The enormous mortgage-bond scandal

reuters ^ | Oct 13, 2010 | Felix Salmon

[dennisw]

The foreclosure mess was bad?

But it gets so much worse once you start adding in a whole bunch of parallel messes in the world of mortgage bonds. For instance, as Tracy Alloway says, mortgage-bond documentation generally says that if more than a minuscule proportion of notes in a mortgage pool weren’t properly transferred, then the trustee for the bondholders can force the investment bank who put the deal together to repurchase the mortgages. And it’s looking very much as though none of the notes were properly transferred.

But that’s not even the biggest potential problem facing the investment banks who put these deals together. It also turns out that there’s a pretty strong case that they lied to the investors in many if not most of these deals.

I mentioned this back in September, and I’ve been doing a bit more digging since then. And I’m increasingly convinced that the risk to investment banks isn’t only one of dodgy paperwork; there’s also a serious risk of massive lawsuits from the SEC or other prosecutors, as well as suits from individual mortgage investors.

Key firm here is Clayton Holdings, a company which was hired by various investment banks — Goldman Sachs, Bear Stearns, Citigroup, Merrill Lynch, Lehman Brothers, Morgan Stanley, Deutsche Bank, everyone — to taste-test the mortgage pools they were buying from originators.

Here’s how it would work:

First, the bank would put in winning bid for the pool of mortgages, with the intention of slicing it up into mortgage bonds and selling those bonds to investors at a profit.

Clayton controlled 70% of the market for this service, which is known as third-party due diligence. But Clayton’s not at fault here, and the problem is likely to apply no matter who performed this service.

[dennisw]

Read it all to understand it!

[listenhillary]

OK I remember reading last year about 64 trillion dollars of the credit default swaps. Does this hammer now fall in addition to the lawyers owning the banks when all is said and done?

[November 2010]

No bailouts for fraud and its consequences.

[traditional1]

Just follow the money, and the UCC "three parts of a contract", OFFER, ACCEPTANCE, AND CONSIDERATION, and you will see that this whole thing is being fabricated of whole cloth, in the interest of Lawyers.

The U.S. Taxpayer, the deepest pockets around, are the targets here; it's not about false or robo-signing at all. It's about how to get Trial Lawyers MORE taxpayer money, period.

This fraud of looting the U.S. Treasury is so out-of-hand now, that Class Action Lawsuits, bailouts, and "Rescue" are used to fill Lawyers' bank accounts, while Contracts aren't worth the paper they're printed on anymore, thanks to Lawyers who have now become Judges, and rule continuously in favor of Lawyers who come to them for their handouts.

[screaming eagle2]

why do I have the feeling that there are more than a few political types involved in this?

[screaming eagle2]

why do I have the feeling that there are more than a few political types involved in this?

[Liz]

One of the major subprime lenders was Daniel Sadek, an immigrant from Lebanon. He was a California car salesman who noticed that high end cars were being bought by mortgage people. He had no mortgage experience but decided to get in on the game. He built the business using late night TV ads to get people who wanted second mortgages.....and became fabulously wealthy.

Sunday, January 4, 2009
How Citi bailed out an O.C. subprime lender (as Citigroup received the biggest federal bailout)
By JOHN GITTELSOHN, The Orange County Register

EXCERPT Biggest bank bailout Quick Loan Funding, which Sadek founded in 2002, wrote about $4 billion in subprime mortgages before it collapsed in 2007. Sadek made, and eventually lost, a fortune through Quick Loan. He bought a Newport Coast mansion, a fleet of exotic cars and a condo in Las Vegas where he became a high roller at the blackjack tables.

Citigroup, the New York financial giant, also boomed and nearly went broke because of subprime-related investments.

Poetic justice Citi's most-binding ties with Sadek are in the securities arena. In 2006, Citigroup Global Markets Inc. underwrote three pools of mortgage-backed securities totaling $1.5 billion, including $295 million in Quick Loan's mortgages. Still buried among its troubled assets are three pools of securities totaling $1.5 billion that include $295 million from Sadek's company. By November, 36 percent of the loans in the three pools were in default, according to Bloomberg data. Bank of America, Bear Stearns, Countrywide Home Loans, Lehman Brothers, Merrill Lynch and Morgan Stanley also securitized and sold Quick Loan mortgages.

Filings with the SEC show at least $2.3 billion of Sadek's Quick Loan's $4 billion mortgages were sold to investors after Wall Street firms packaged them as mortgage-backed securities, collateralized debt obligations and other complex financial instruments. "In some cases, Citi purchases loans which may have been modified by another servicer," Rodgers said. "If a loan is owned by an investor, the right to modify is subject to the agreement under which the loan is serviced."

In November Citi got the biggest taxpayer-backed bailout of any bank in U.S. history – $45 billion, double the $23 billion to General Motors and Chrysler. Citi also got $306 billion in federal loan guarantees for its securities, loans and other real-estate-backed assets.

$35 billion in loan mods Mark Rodgers, a Citi spokesman, said the bank wants to help borrowers repay loans when feasible. "This would depend on individual circumstances and an agreement mutually agreed upon by both the lender and the borrower." Citi modified 370,000 loans worth $35 billion to help customers avoid foreclosure, the company reported in November. Thousands more borrowers are trying to get a break. Rodgers said Citi does not have data on how many of these new loans have defaulted.

According to the U.S. Comptroller of the Currency, more than half of the loan mods in the first quarter of 2008 defaulted within six months. Mark Goldman, a lecturer in real estate at San Diego State University, said lenders have nothing to gain by giving a break to borrowers who probably won't repay their loans. "It doesn't serve the lender to do a loan modification that'll result in a default," he said. Which raises the question: Why did Citi give Sadek more time? --SNIP--

Filings with the Securities and Exchange Commission show at least $2.3 billion of Sadek's Quick Loan's $4 billion mortgages were sold to investors after Wall Street firms packaged them as mortgage-backed securities, collateralized debt obligations and other complex financial instruments. "In some cases, Citi purchases loans which may have been modified by another servicer," Rodgers said. "If a loan is owned by an investor, the right to modify is subject to the agreement under which the loan is serviced."

Sadek and Citi. Citi's business dealings with Sadek date to the founding of Quick Loan Funding in 2002. Citi's subsidiary, First Collateral Services, gave Sadek a line of credit – known as a warehouse line – to fund his mortgages. As Quick Loan grew – issuing a peak $218 million worth of mortgages in December 2005 – other warehouse lenders gave the company lines of credit. At its peak, the Citi warehouse line was $100 million, Pacific said.

When Quick Loan's collapse accelerated in the spring of 2007, Citi was the last warehouse lender left, Sadek said during an April 2007 interview at his Newport Coast mansion. During the interview, Sadek said Citigroup provided a $16 million line of credit to help him market his feature film, "Redline," which starred his then-girlfriend, Nadia Bjorlin, and his fleet of Ferraris, Porsches and Saleen S7 exotic cars. Sadek said he spent $31 million to make, distribute and publicize "Redline." The film earned $8.2 million in ticket sales worldwide, according to Box Office Mojo. Sadek is being sued in federal court by the Cartoon Network for failing to pay $845,000 in advertising for the film.

Other defunct Orange County subprime lenders New Century Financial and Ameriquest - also had mortgages in the three Citi 2006 securities issues. By this November, $386 million of those mortgages were more than 60 days delinquent, records show. Since 2007, Citi has written off $29.3 billion of subprime-related debt. Citi still has $16.3 billion in subprime assets on its books plus $13.6 billion in Alt-A securities, which are mortgages to borrowers with credit between subprime and prime. Those troubled assets – and Citi's place as a pillar in the financial community with 370,000 employees and $159 billion in revenue in 2007 – explain why the federal government has offered Citi so much help.

"The Feds just worried that it's so big, so interconnected with the rest of the financial industry, that they can't let it fail," said Kurt Eggert, a Chapman University law professor and former advisor to the Federal Reserve Bank. "It's poetic justice that Citi was in bed with this guy and they're stuck with him," Eggert said. "But why is it so hard for regular Joes to get loan mods when this guy, who seems like a terrible loan risk, can do it?"

[Liz]

Yeah, that's him.

More on Sadek if you can stomach it..................

Sadek gets refinanced amid a tsunami of court judgments Most borrowers would have a hard time getting a hearing from a bank if they were already in default on a million dollars in other debts. Records on file with the Orange County Clerk-Recorder show that Sadek faces $1.5 million in debts, including:
•State Franchise Tax Board liens totaling $545,922 in taxes and penalties.
•Orange County tax collector liens totaling $8,998.
•Liens from the Newport Coast homeowners association, for $1,588, and The Marquee Park Place Homeowners Association in Irvine, for $7,517, both for monthly association fees.
•Court judgments from Wells Fargo Bank, for failure to make payments on leased equipment ($603,289) and Wells Fargo ($294,341) for other debts.

This summer, Citigroup, the Wall Street bank that has received this year's biggest federal bailout, offered to modify its loan terms and help Sadek keep a home after he fell two months behind on his mortgage. But on Dec. 18, Citi Residential Lending filed a notice of default after Sadek failed to make the new payments on the house at 65 Briar Lane in Irvine, one of at least four residential properties he owns in Orange County. (Click here to see a map of the houses) That Sadek even got a second chance with Citi angered industry watchers who complain that banks have done too little, even with billions in federal assistance, to help borrowers facing foreclosure. "There's a big irony, when thousands of people are struggling to get affordable loan modification offers from servicers that aren't responsive, that someone who has perpetrated harm would get a loan modification," said Paul Leonard, of the Center for Responsible Lending. "It's incredible."

Owner occupied The original mortgage, issued by Sadek's Quick Loan Funding in August 2006, was for $768,000. Under Citi's loan modification, the principal rose to $800,000, records show. Zillow.com estimates the home is worth $632,500. The original mortgage was an interest-only loan. Under the Citi loan modification, Sadek's monthly payments increased almost 50 percent to $6,445 – the interest, principal, taxes and insurance on an $800,000 mortgage. The latest notice of default said Sadek owed $34,888 as of Dec. 18, indicating he had not made a single payment since the loan modification. The notice says Sadek still has 90 days to catch up with his payments before he will lose the house. The record is unclear how Citi got authority to modify Sadek's original mortgage. Citi declined to discuss Sadek's loan, citing client privacy rights. Sadek's original loan – No. 106087598 – was not part of the three Citi mortgage pools.

On the Citi loan modification, Sadek said 65 Briar Lane is "owner occupied" and that he "will suffer a hardship" if the terms of the loan are increased too much. Other public records list his home address as 3 Longboat in Newport Coast, where Sadek was interviewed by the Register in April 2007.

Borchard said he could not comment on the address discrepancy. Rodgers said borrowers can demonstrate their residence by producing a utility bill. When a Register reporter visited the Briar Lane house, a woman living there said Sadek was "not here." But she would not say if he lived there.

Lou Pacific, a real estate and mortgage consultant from Mission Viejo who was a vice president at Quick Loan Funding in 2004 and 2005, said he was surprised by the Citi loan modification, given Sadek's financial resources and multiple residences. "The usual way you qualify for a loan mod is if you live in the home and you have a valid hardship," Pacific said.

Reached by phone, Sadek said he "did not want to be rude," but he did not want to talk. His attorney, Thomas Borchard, said he was unaware of the Citi loan modification."I know he and Quick Loan Funding have a long-standing history with Citi," Borchard said. "I'd assure you there's some logical explanation."

Reached by phone, Sadek said he "did not want to be rude," but he did not want to talk. His attorney, Thomas Borchard, said he was unaware of the Citi loan modification."I know he and Quick Loan Funding have a long-standing history with Citi," Borchard said. "I'd assure you there's some logical explanation."

(Tell that to the taxpayers.)

[rickb308]

“which claimed that investors were told that the due diligence had been done: on page 48 of the prospectus, there’s language about how the underwriter had done an “underwriting guideline review”, although there’s nothing specifically about hiring a company to re-underwrite a large chunk of the loans in the pool, and report back on whether they met the originator’s standards.”

IOW, reading a prospectus doesn’t mean squat anymore. I wonder how many companies, in how many different industries, are playing this fast & loose with their prospectus’s?

[rickb308]

“He was a California car salesman “

It all comes back to them. LOL

[major-pelham]

Right on the head. The lefty’s want folks to stay in their houses for years without paying. They don’t understand the moral hazard they are promoting. I heard Elizabeth Warren last night - scary. In no way can bad paperwork account for not paying your mortgage, it’s a joke.

Likewise, on the other financier’s side, claims of lackluster due diligence, years after the fact, is total BS. Can’t anyone man-up to anything anymore ?

[Liz]

Finance Reform: HUD's New Slush Funds, Thanks To FinReg
IBD Editorials | July 29. 2010 | Investors Business Daily staff
FR Posted by Kaslin

HUD is at the heart of the subprime scandal, yet it's empowered as never before by FinReg. It'll manage various slush funds underwriting more Acorn-type housing activism. Housing and Urban Development is one of two federal agencies regulating Fannie Mae and Freddie Mac, with HUD supervising the mortgage giants' congressionally chartered "affordable housing" mission.

In the run-up to the subprime crisis, HUD gutted underwriting standards at Fannie and Freddie to help them meet a 50%-plus affordable lending quota. HUD also authorized the now-toxic twins to receive credits toward these affordable-lending goals by purchasing and issuing subprime securities.

So HUD not only drove Fannie and Freddie headlong into the subprime market, but also helped create the subprime securities market, thereby spreading the mortgage-backed securities risk on Wall Street. Its relationship with Fannie and Freddie won't change under the new law. FinReg doesn't rein in HUD, just like it doesn't rein in Fannie or Freddie.

Far from reforming HUD, the new law gives the agency even more power over the housing industry — including setting up new grant programs that will funnel billions of dollar in aid to the same housing-rights activists and community organizers that originally pushed lenders off the subprime cliff.

The Dodd-Frank Wall Street Reform and Consumer Protection Act — named after HUD's biggest boosters in the Senate and House — authorizes HUD to set up: • A housing "stabilization program" for redeveloping urban neighborhoods, with funding starting at $1 billion. (Excerpt) Read more at investors.com ...

==========================================

Village Voice 8-5-08 Andrew Cuomo, the youngest Housing and Urban Development Secretary in history, made a series of decisions between 1997 and 2001 that gave birth to the country’s current economic crisis.

Cuomo took actions that—in combination with many other factors—helped plunge Fannie and Freddie into the subprime markets without putting in place the means to monitor their increasingly risky investments.

Cuomo turned the Federal Housing Administration mortgage program into a sweetheart lender with sky-high loan ceilings and no money down, and he legalized what a federal judge has branded “kickbacks” to brokers that have fueled the sale of overpriced and unsupportable loans.

Three to four million families are facing foreclosure (as of 2008), and Cuomo is one of the reasons why....

SOURCE http://www.villagevoice.com/2008-08-05/news/how-andrew-cuomo-gave-birth-to-the-crisis-at-fannie-mae-and-freddie-mac/

The buzz was that then-HUD Secy Cuomo was pocketing bigtime from his HUD machinations. Enough to finance his gubernatorial bid; politicians always plan ahead (/snix).

==========================================

Sen Candidate Kirsten Killibrand appointed to Hillary's Senate seat was also at HUD....... Gillibrand played a key role in furthering HUD’s Labor Initiative and *New Markets initiative, working to strengthen enforcement of the Davis-Bacon Act and drafting new markets legislation for public and private investment in building infrastructure to revitalize lower income areas across the nation."

NOTE * New Market Initiatives are also known as "subprime markets," the self-same sub-prime markets that precipitated the destruction of the US economy.

[Liz]

If not one new home was built, it will still take three years to move all the inventory cuurently on the market.

That does not factor in all the new foreclosures coming down the pike in the next two years as the Obama depression suffocates Americans who will not be able to afford underwater homes and skyrocketing property taxes.

[Liz]

SUB-PRIME SCAMMERS FALSIFYING DOCUMENTS CONTINUES On his Citi loan mortgage modification app, Sadek said 65 Briar Lane is "owner occupied" and that he "will suffer a hardship" if the terms of the loan are increased too much. Other public records list his home address as 3 Longboat in Newport Coast, where Sadek was interviewed by the OC Register in April 2007.

65 Briar Lane

Views at Longboat in Newport Coast.

[Notary Sojac]

From the original article:

The investment banks didn’t mind buying up loans they knew were bad, because they considered themselves to be in the moving business rather than the storage business. They weren’t going to hold on to the loans: they were just going to package them up and sell them on to some buy-side sucker.

This is what it's really all about. Everyone was in the "moving business" up until the loans wound up with Fannie and Freddie, where they are in permanent "storage".

[Alberta's Child]

This is a very interesting article, and one reason for it is that I don't necessarily see "fraud" jumping out at me as I expected.

It sounds to me as if the buyers of these collateralized debt obligations (mortgage bonds) may not have done their due diligence on a lot of these deals -- and this, coupled with the fact that these CDOs are such an open, unregulated field of investments, was what made it ripe for abuse that may not actually constitute fraud.

Something to keep in mind is that this isn't all that unusual in the modern financial services industry in the U.S. A lot of money has been made in the past simply because the people coming up with the great ideas and circumventing (legally) the regulatory bodies that oversee these things were always one step ahead of the regulators. I use Michael Milken and his entire junk bond industry of the 1980s as a perfect case in point. That guy was a financial genius who understood corporate finance better than anyone, and the vast majority of the "scandal" surrounding him (from a media perspective) involved no illegal activity whatsoever.

[fightinJAG]

One thing this author doesn’t mention: the reason the hedge funds couldn’t have cared less about how poor the investment quality of the mortgage pools were.

It wasn’t simply because they were “in the business of moving, not storage.” That is, in the business to simply (and quickly) slice up and sell the pool. The fact is that at some point almost everyone who touched mortgages had the idea — rightly, it turned out — that there really was nothing too much to worry about BECAUSE THE GOVERNMENT WOULD END UP BACKSTOPPING ANY LOSS THAT OCCURRED ALONG THE WAY.

This, in fact, is what basically happened thus far. The gain was private, the loss was public.

This degree of government presence in the market, even if shadowy through FanFredFHA, acted like investment loss insurance in the psyche of the market.

[November 2010]

I think you are wrong on due diligence point. From what I read, Citi did the due diligence, found 45% of the loans didn’t meet underwriting standards, negotiated the price for the loans lower, but didn’t inform the buyers that 45% of the loans surveyed didn’t meet underwriting standards. The kicker in the article is that the buyers did not have access to the individual loan information. Citi didn’t give the actual loan info on each mortgage to the buyer; wasn’t available to the buyer to do the due diligence.

[mo]

Its increasingly obvious We the People need to take Washington apart and re-assemble a functioning representative government.