The Robo-Signing mess is just the tip of the iceberg, mortgage putbacks will be the harbinger of the collapse of big banks that will dwarf 2008!
by Reggie Middleton, BoomBustBlog
Posted originally on October 12, 2010
NOW THAT THE ROBO-SIGNING SCANDALS HAVE ACHIEVED FULL NOTORIETY THROUGH THE MEDIA, it is time to address the real issues facing investors in bank stocks. I also believe that the media is staring at the wrong target. Each major media outlet is copying what is popular or what the next outlet broke as a story versus where the true economic risks actually lie – which is essentially the real story and where the meat actually is.
Here’s what’s truly at stake – the United States is now at risk of losing its hegemony as the financial capital of the world! Why? Because when we had the chance to put the injured banks to sleep and redirect resources to into new productivity, we instead allowed politics to shovel hundred’s of billions in taxpayer capital into zombie institutions as they turned around and paid much of it right back out as bonuses. As a result, significant capital has been destroyed, the original problem has metastized, and the banks are still in zombie status, but with share prices that are multiples of the actual values of the entities that they allegedly represent – a perfect storm for a market crash that will make 2008 look like a bull rally! For those who feel I am being sensationalist, I refer you to my track record in making such claims.
The Japanese tried to hide massive NPAs in its banking system after a credit fueled bubble burst by sweeping them under a rug for political reasons. Here’s a newsflash – it didn’t work, it hasn’t worked for 20 years, and despite that Japan is embarking on QE v3.3 because it simply doesn’t believe that it is not working. Here are the steps the US is consciously taking it its bid to enter a 20 year deflationary spiral like Japan, and may I add that these steps were clearly delineated on BoomBustBlog ONE YEAR ago (Bad CRE, Rotten Home Loans, and the End of US Banking Prominence? Thursday, November 12th, 2009), so no one can say this is a surprise.
Step one: Hide the Truth!
Step two: Formulate intricate lies to placate the masses
In this case, the US bank stress tests: You’ve Been Bamboozled, Hoodwinked and Lied To! Here’s the Proof. What Are You Going to Do About It? We have government complicity in the purposeful opacity of the values of the mortgage assets (see the FDIC Prudent Commercial Real Estate Loan Workouts guidance issued Oct 30th 2009, as reported by the WSJ: Banks Hasten to Adopt New Loan Rules and the new FDIC guidance that states performing loans “made to creditworthy borrowers” will not require write downs “solely because the value of the underlying collateral declined”).
Step three: Being forced to face the music
This is where we are now, and I will go through this in more detail below.
Step four: The eradication of US banks from global prominence
Not the floundering of the banks that I predicted in 2007 and 2008, but the outright collapse of many (and probably most) of the big ones, or at the very least significant shrinkage. Does this sound outrageous to you? For those of you who believe that the government’s “pretend and extend” policy has any chance in hell of working, or better yet, that we are not following in the footsteps of Japan, let’s take a pictorial trip through recent history. There are practically no Japanese banks in the top 20 bank category on global basis by 2003 – NONE (save potentially Nomura, which arguably survived in name, alone). As you can see, they literally dominated 90% of the space in 1990!
The European banks are not faring much better than the US banks,either – reference the Pan-European Sovereign Debt Crisis, as I see it. This is so much more serious than robo-signing scandals, and I have been shouting about this nonsense of 3 years straight. Well, are we following the Japanese “Lost Path”? Notwithstanding the damning evidence of hide the truth and hide amongst lies linked to above, ponder the following rather dated, but still quite poignant data…
Keep in mind that the US housing futures data above is based on the unrealistically optimistic Case Shiller index.
Robo-Signing: What is the real issue at hand?
The Robo-Signing issues have arisen because some mortgage servicers have been signing off foreclosure documents without actually reading them, or doing so without the presence of a notary. Thus, the Office of the Comptroller of the Currency (OCC) has directed seven of the US’ biggest lenders — BAC, JPM, WFC, Citi, HSBC, PNC and UBS — to review their foreclosure processes. Consequently, Bank of America, JP Morgan Chase and GMAC Mortgage have suspended foreclosure cases in 23 states after noting their employees may have mishandled foreclosure documents. Goldman Sachs is following suit via their Litton Loans arm. It should also be noted that the document forgery issues penetrate much farther than just distressed properties and foreclosures. Evidence has surfaced that all types of forgeries and misrepresentations are abound in all types of mortgage paperwork. 4closureFraud (a sight where I sourced a lot of the recent robo-signing scandal info from) has a post that actually shows President Obama’s mortgage paperwork as a “Victim to Chase Robo-Signer” This mess, in and of itself, will be difficult to untangle.
For those who didn’t notice, this is a regulatory “hold it” to the MERS system and an alert to its constituency, many of whom are subjects of extensive BoomBustBlog forensic analysis. Major MERS shareholders include: • Bank of America • Chase Home Mortgage Corporation of the Southeast • CitiMortgage, Inc. • Fannie Mae • Freddie Mac • GMAC Residential Funding Corporation • HSBC Finance Corporation • Merrill Lynch Credit Corporation • MGIC Investor Services Corporation • Mortgage Bankers Association • Nationwide Advantage Mortgage Company • PMI Mortgage Insurance Company • Stewart Title Guaranty Company • SunTrust Morgage, Inc. • United Guaranty Corporation • Washington Mutual Bank • Wells Fargo Bank, N.A.
These companies will start infighting as their myriad interest start to conflict with each other. Title insurers will balk at insuring what could be defective title, banks will fight insurers who will try to renege on insurance and/or put back loans through the warranties and representations clause as losses to investors mount though either increased expenses to work out the paperwork mess or outright losses due to fraud.
Make no mistake, the amount of litigation that is being thrown at these banks and service companies is significant, and they are shining lights on aspects of the banking world that were most conveniently kept secret, as in this class action suit that outlines the contradictory wording in the MERS paperwork (reference pages 10, 11 and 15). Pages 15 on makes issue of fraudulent assignments, of Robo-Signing fame – see for yourself:
Here is a deposition of one of the “said” secretaries from another suit in New Jersey
Q Does MERS have any salaried employees?
Q Does MERS have any employees?
A Did they ever have any? I couldn’t hear you.
Q Does MERS have any employees currently?
Q In the last five years has MERS had any employees?
Q To whom do the officers of MERS report?
A The Board of Directors.
Q To your knowledge has Mr. Hallinan ever reported to the Board?
A He would have reported through me if there was something to report.
Q So if I understand your answer, at least the MERS officers reflected on Hultman Exhibit 4, if they had something to report would report to you even though you’re not an employee of MERS, is that correct?
MR. BROCHIN: Object to the form of the question.
A That’s correct.
Q And in what capacity would they report to you?
A As a corporate officer. I’m the secretary.
Q As a corporate officer of what? Of MERS.
Q So you are the secretary of MERS, but are not an employee of MERS?
A That’s correct.#000000;”>etc… How many assistant secretaries have you appointed pursuant to the April 9, 1998 resolution; how many assistant secretaries of MERS have you appointed?
A I don’t know that number.
A I wouldn’t even begin to be able to tell you right now.
Q Is it in the thousands?
Q Have you been doing this all around the country in every state in the country?
Q And all these officers I understand are unpaid officers of MERS?
Q And there’s no live person who is an employee of MERS that they report to, is that correct, who is an employee?
MR. BROCHIN: Object to the form of the question.
A There are no employees of MERS.
And even more damning, this particular suit gets right to the heart of the matter from an economic AND legal perspective (something that the previous suits have not) and that is that the banks were complicit in overvaluing both the lender and the collateral at the point of underwriting, and doing so on a broad basis. This is the notion behind my premise that a wave of losses and litigation will be coming any minute now as investors and the insurers facing claims from those investors attempt to put back loans on a wide scale and near universal basis as the rampant fraud of the real estate bubble of the new millenium is exposed and litigated throughout the court system.
Those entities that swallowed loan mills such as Wachovia, Countrywide, Nationwide, Lehman, Bear Sterns, Merrill Lynch and WaMu will be feeling their indigestion.
I read through portions of a couple of filings and there appears to be some technical errors and maybe even a slight misunderstanding of the banking business, but if these guys (the plaintiff’s attorneys) get their act together in terms of coordinating with each other and getting some real expertise on the subject matter to bolster their filings, I really don’t see how this will not – at the very least – materially drive the expense ratios of both the banks and the investment pools, and at worst hasten the inevitable demise of those entities that underwrote or bought the bad paper then paid the gift of US taxpayer capital (TARP,ZIRP, PPIP, etc. ) out as bonuses versus alleviating the matter at hand.
Impact on RMBS and CDOs
Most analysts believe that a break in foreclosures will not be an optimistic sign for Residential Mortgage Backed Securities (RMBS). This is because RMBS portfolios that contain the foreclosure loans will likely experience higher loss severities due to longer liquidation timelines. Additionally, the RMBS market is expected to witness a large number of repurchases as well as higher monetary losses and ratings downgrades if it is proved that loans were not serviced in accordance with regulatory guidelines. Of course, I believe that servicing is the minor issue. It is the faulty underwriting that is the canary in the goldmine here, and the servicing issues is simply the impetus that will shine the light on the premise that at least half of the high LTV loans written were done so on a fraudulent basis.
GMAC Mortgage Class Action Lawsuit Complaint Filed Over Alleged …
Oct 4, 2010 … GMAC Homeowners In Maine File Class Action Lawsuit Complaint Against GMAC Mortgage Over Alleged False Foreclosure Documents, Affidavits and. classactionlawsuitsinthenews.com/class-action-lawsuits/gmac-mortgage-class-action-lawsuit-complaint-filed-over-alleged-false-foreclosure-docu… – Cached
Wrongful Foreclosure Class Action « Timothymccandless’s Weblog
Jan 15, 2010 … 13 Responses to “Wrongful Foreclosure Class Action” … I would like to be included in your class action lawsuit. I am a victim of predatory … timothymccandless.wordpress.com/…/wrongful-foreclosure-class-action/
According to Canadian rating agency DBRS “The recent findings could have far reaching implications throughout the industry with hundreds of thousands of homeowners contesting foreclosures that are in process or have been completed; ultimately causing servicers to face losses due to expensive litigation and class action lawsuits. The biggest uncertainty remains on how the courts will view the “legality” of foreclosures that have already taken place and what actions, if any, will be taken to remedy the situation.
DBRS believes that servicers will be able to quickly correct and refile any deficient affidavits in addition to implementing the appropriate controls to ensure there is not another breakdown in process. However, RMBS that contain these loans will likely experience higher loss severities due to longer liquidation timelines, negative rating actions and the potential for loans to be repurchased out of the transaction due to breaches of representation and warranties if it is proven that they were not serviced in accordance with applicable guidelines. DBRS will continue to monitor the impact of this situation on its rated transactions and take any rating actions as necessary” (Source: http://ftalphaville.ft.com/blog/2010/10/05/360811/from-robo-signing-to-rmbs/)
Researchers at DBRS also highlighted that the robo-signing debacle will likely lead to a large number of residential mortgage-backed securities repurchases as well as higher monetary losses and continual ratings downgrades if it is proven that loans were not serviced in accordance with federal guidelines. (Source: http://foreclosureblues.wordpress.com/2010/10/04/rmbs-buybacks-expected-to-increase-due-to-robo-signing-dbrs/)
Every material development is impetus for the potential for putbacks due to breaches of representation and warranties Uncertainty in the RMBS market in terms of actual valuation is a result of rampant and provable inflation of appraisal prices during the underwriting of said mortgages and not so much falsification of documents since in many cases those documents can be cured, but misrepresentation cannot! You do not hear this in the media circuits, but it is a fact. Thus, the underwriting banks face the chance of systemic losses. I have warned of this about a year ago – Banks Swallow Another $30 billion or So in More Losses as Their Share Prices Surge (Again). You see, banks often allowed for the inflation of appraisal values and/or income/assets, but the broker channel did it as par for the course.
This is the part that everybody seems to be overlooking…
All you really need to do is find the banks that accepted a lot of broker business, factor in the expense of the class action suit litigation that is popping up in nearly every state (try Googling it, you will be amazed as big firms and store front lawyers alike are throwing their hats in the ring), and you will see the easiest way out of a potentially tough bind for investors is the put back. Where does this land? Squarely on the balance sheet of the banks – who, BTW have the money to attract even more predatory lawyers. A forensic review of high LTV loans between 2003 and 2007 should find that at the very least 30% were aggressively valued, with a more realistic number coming in at about 60%. Ask anyone who was in in the business at that time, I doubt they will disagree.