Blame the Victims and Enrich the Perpetrators

Blame the Victims and Enrich the Perpetrators
Janet Tavakoli is the president of Tavakoli Structured Finance, and  
has more than 20 years of experience in senior investment banking  
positions, trading, structuring and marketing structured financial  
products. She is a former adjunct associate professor of derivatives  
at the University of Chicago’s Graduate School of Business.  Author  
of: Credit Derivatives & Synthetic Structures (1998, 2001),  
Collateralized Debt Obligations & Structured Finance (2003),  
Structured Finance & Collateralized Debt Obligations (2008), and Dear  
Mr. Buffett: What an Investor Learns 1,269 Miles from Wall Street  
(2009).

~~~

It’s outrageous the way subprime borrowers swarmed and solicited  
unsuspecting lenders and camped out in the offices of investment banks  
to push them to find ways to finance their insatiable need for capital  
to purchase homes. It’s a scandal the way they got in bed with  
appraisers to get the home values stated at three to five times market  
value. It’s criminal the way they falsified income to push through the  
mortgage loans. Oh wait… they didn’t. [Hat tip to Nomi Prins, author  
of It Takes a Pillage.]

While there were instances of fraud by borrowers, the key drivers of  
our housing crisis were fraud perpetrated by mortgage lenders and  
securities fraud — by some of our most revered financial institutions  
— that provided money to fuel fraudulent mortgage lending.

After the largest bank bailout in world history, we have a national  
epidemic of foreclosure fraud. In cases where foreclosures are being  
delayed, banks are walking away from abandoned homes and sticking  
local taxpayers with the bill to clean up the mess they left behind.

Yet, as Arianna Huffington points out in her latest book, banks  
continue to find ways to get Americans to subsidize problems that the  
banks themselves were chiefly responsible for creating. Consumers  
struggle to keep up with payments as the unemployment rate rises along  
with food and energy prices, and loan resets kick in:

When they don’t, banks, trying to offset losses in other areas, turn  
around, hike interest rates, and impose all manner of fees and  
penalties–all of which makes it less likely consumers will be able to  
pay off mounting debts.
Third World America: How Our Politicians Are Abandoning the Middle  
Class and Betraying the American Dream Pp. 77 & 78.

GSAMP: Garbage Sold at Mythical Prices

In 2007, the state of Ohio kicked the California-based New Century  
mortgage lending carpetbaggers out of the state and barred New Century  
from doing business after despicable practices. A complaint of alleged  
fraud on the part of Goldman Sachs detailed its close relationships  
with Countrywide, New Century, and Fremont. The complaint showed  
Goldman knew of “an accelerating meltdown for subprime lenders such as  
New Century and Fremont.” Despite known serious loan problems, Goldman  
continued to securitize the loans and sell them in packages of  
residential mortgage backed securities.

Suspect deals like GSAMP-2006 S3; $494 million of securities bought by  
institutional investors in April 2006 were created and distributed by  
Goldman Sachs Alternative Mortgage Products (GSAMP).

Fortune’s Allan Sloan and Doris Burke followed the deal as its value  
slid ever downward as well as the fudgy way the deal’s deteriorating  
value seemed to be overstated by the trustee’s report:

More than a third of the loans were on homes in California, then a  
superhot market, now a frigid one. Defaults and rating downgrades  
began almost immediately. In July 2008, the last piece of the issue  
originally rated below AAA defaulted — it stopped making interest  
payments. Now every month’s report by the issue’s trustee, Deutsche  
Bank, shows that the old AAAs — now rated D by S&P and Ca by Moody’s  
[junk ratings] — continue to rot out.
As of Oct. 26, date of the most recent available trustee’s report,  
only $79.6 million of mortgages were left, supporting $159.9 million  
of bonds…But even worse, those mortgages aren’t worth anything like  
their $79.6 million of face value, according to ABSNet Loan HomeVal…As  
of Sept. 26 — a slightly different date from what we’re using above —  
ABSNet valued the remaining mortgages in our issue at a tad above 20%  
their face value. Now, watch this math. If the mortgages are worth 20%  
of their face value and each dollar of mortgages supports more than $2  
of bonds, it means that the remaining bonds are worth maybe 10% of  
face value.

“Junk mortgages: It just gets worse, ” by Allan Sloan and Doris Burke,  
Fortune, December 1, 2009.

“Countrywide Broke the Law”

In above mentioned complaint against Goldman Sachs, allegations of  
suspect practices from mortgage lenders, including Countrywide, now  
owned by Bank of America, were revealed. According to a former  
Countrywide employee:

“approximately 90% of all reduced documentation loans [also known as  
"liars' loans] sold out of a Chicago office had inflated incomes, and  
one of Countrywide’s [mortgage brokerage arms] routinely doubled the  
amount of the potential borrower’s income…so that borrowers could  
qualify for loans they could not afford.”

When Countrywide’s employees received documents verifying income that  
showed the borrower couldn’t afford the mortgage and didn’t qualify  
for a loan, they simply ignored it and “the loan was re-submitted as a  
stated income loan with an inflated income figure so as to facilitate  
the approval of the loan.” In other words, the former Countrywide  
employee said that brokers, not borrowers, engaged in massive fraud to  
push loans through the system and earn commissions.

Illinois Attorney General Lisa Madigan told First Business Morning  
News: “Countrywide broke the law, homeowners did not.”

Pump and Dump

The same banks that supplied money — and in some cases now own —  
suspect mortgage lenders also packaged up and sold those loans to  
investors. These banks also own or owned “servicers” that are supposed  
to act as stewards for investors. But if servicers cannot recover  
foreclosure costs combined with the costs of maintaining and reselling  
the house, they often abandon the property. After pumping up  
appraisals and falsifying borrowers’ income on applications, banks are  
walking away. Once again, American taxpayers will foot the bill:

In Chicago, the mortgage servicers and trustees most often associated  
with the [abandoned] properties are Bank of America, with 314  
properties; Wells Fargo (234), U.S. Bank (185), Deutsche Bank (178),  
and JPMorgan Chase (165).
“More banks walking away from homes, adding to housing crisis,” by  
Mary Ellen Podmolik, Chicago Tribune, January 13, 2011. (Source of  
data on homes apparently abaondoned in the foreclosure process is a  
new local study by the Woodstock Instititue.)

Despite evidence of widespread interconnected mortgage lending,  
securitization, and foreclosure wrong-doing and fraud, there are no  
meaningful felony indictments. Arianna Huffington suggests a solution  
and a long and difficult road ahead:

The most effective way of fixing the multitude of problems facing  
America is through the democratic process, but the democratic process  
itself is badly broken. That is why the first step toward stopping our  
relentless transformation into Third World America has to be breaking  
the choke hold that special interest money has on our politicians.
Third World America P. 172






  The Big Picture 1/15/11 8:12 AM Guest Author Think Tank GSAMP Comments

-- 
dadl-ot mailing list
http://mail.thehood.us/mailman/listinfo/dadl-ot_thehood.us
http://news.gmane.org/gmane.music.dadl.ot