The #robosigning dam on mortgage fraud may be breaking

The Nevada AG's office has indicted two people for more than 600 charges of robosigning:

A Clark County District Court judge issued warrants for California residents Gary Randall Trafford, 49, and Geraldine Ann Sheppard, 62, after a grand jury handed up the 439-page indictment. Their hometowns were unavailable, and they could not be immediately located for comment.

The indictment says that between 2005 and 2008, Trafford and Sheppard directed employees to forge their names on foreclosure documents, then notarize the signatures they just forged. The defendants then had the employees file the fraudulent notices of default with the county recorder's office to begin foreclosures on homes.

Trafford and Sheppard face more than 200 felony charges of offering a false instrument and false certification of an instrument, and more than 100 misdemeanor notarization charges, Attorney General Catherine Cortez Masto said.

This is BIG. The feds (that's YOU, Dear Leader) and the big banks have been, well, co-conspirators in trying to ram a mortgage reset agreement down states' throats, and it looks like one state, at least, may be getting tired.

Michigan's started down the criminal proceedings road, too, but nothing like this. And, California AG Kamela Harris has now subpoenaed Fannie and Freddie officials. She's already refused to sign off on Team Obama's cramdown-for-states "negotiations" with the banksters.

Now, technically, this isn't robosigning, as in using autopens, etc., or doing computerized filing instead of paper documents, but, this is a warning shot about that, at least.

Given how both mainstream parties colluded in this fraud, let's see if, like Occupy Wall Street, this becomes a hot potato/hand grenade, and how much of one.

Part of that will depend on whom the GOP nominates. If it's Romney, Obama will have the tough choice of either sucking up to Wall Street even harder than he is now, or tacking/pandering further "left" while trying to sound both more truthful and more convincing about this than before.

Most other GOP candidates? Given that Cain is too nuts to be trusted by Wall Street, and Perry, Bachmann and Paul have all pledged to junk the Fed and to let too big to fail banks ... fail. Gingrich might get a fair cut of Wall Street money, but, I'm not sure tea partiers trust him as much as Bachmann, or even Paul, despite his apostasy on foreign policy. Huntsman, Santorum and Johnson aren't going to get the nomination.

And, since no GOP primary before April 1 can be winner-take-all, there's plenty of reason for every wingnut candidate to hang in there. Especially since "Super Tuesday," which was in February in 2008, will be in March this year. I'll come back to this point as the Iowa caucuses get near, then we get past that and approach the New Hampshire primary.

Subprime lending sharks now subprime loan fixers

And, with a lot of similar tactics.

“We just changed the script and changed the product we were selling,” said Jack Soussana, who ran the Los Angeles sales office of Federal Loan Modification Law Center.

Oh, and FLMLC hired Soussana precisely because he was such a “good” subprime shark before.

Wunderbar. How many of your new clients will be in a second default in a couple of years? How many will have a new balloon note to replace an old one?

Stiglitz – plenty of blame on economic crisis

In one of the clearest bipartisan finger-pointings yet, Joseph Stiglitz tells us five critical decisions, or non-decisions, got us to where we are at today.

Enough of them, between fallout from the first bad decision, and the second bad decision, occurred within the Clinton Administration of Stiglitz’s government service, it’s quite clear now why Obama Larry Summers hasn’t had him involved with financial transition decisions.

Pounding sand down the subprime rathole

Half of home mortgage refis still default

Given that, despite some neolib economic types on Keynesian steroids, half of mortgages refinanced earlier this year defaulted within six months, should be be more careful with whom we make eligible for loan modification programs?

Many shady loans were taken out by would-be flippers, or "investment income" buyers.

Guess what, folks? You bought a $500K or $5Mil stock portfolio, only yours is a physical property covering 4K square feet. Deal with it.

At the same time, are there people who either didn't have the money, or else didn't have the fiscal discipline or acumen, to be buying a house in the first place?

Republicans did go overboard with their Fannie Mae/Freddie Mac bashing, and the attacks on the Community Reinvestment Act had no connection to reality.

That said, they were right that a lot of loans were pushed on people who shouldn't have had them in the first place.

In all of the above cases, two blank checks don't make a right.

How Moody’s contributed to the subprime crunch

When you have a better operating margin than ExxonMobil and your CEO is trying to improve it, you’re probably going to be a soft touch for creative new financing vehicles.

Even though the standards at many lenders declined precipitously during the boom, rating agencies did not take that into account. The agencies maintained that it was not their responsibility to assess the quality of each and every mortgage loan tossed into a pool.

Then what the hell were you rating? Or why were you in this business?

The full story, which focuses on Moody’s in the last decade, probably could apply to Fitch’s and S&P about as well.

The hypocrisy of Warren Buffett on the subprime crisis

Is on full display in this Portfolio expose.

You know how everybody's been touting the genius of Warren, how he warned derivatives were "financial weapons of mass destruction," etc.?

Well, a lot of people also know that Moody's, etc., the financial ratings agencies, were a big part of the problem, by their jacked-up ratings of CDOs, etc.

Guess who owns 20 percent of Moody's?

No names, but his initials are Warren Buffett.

But, it's only starting to get bad, the story that's laid out in Portfolio.

Investor Steve Eisman, by the time he laughed at a Moody's investor, in the same section of the story, was already "shorting" the bonds based on the worst tranche of subprime-loan based CDOs. But, financial investment agencies were then creating new CDOs based on Eisman's shorts!

Eisman said it's the equivalent of drafting Peyton Manning in fantasy footbal, and the act of drafting him creates a second fantasy Peyton.

“It was like feeding the monster,” Eisman says of the market for subprime bonds. “We fed the monster until it blew up.”

It's a long story, nine webpages if not in single-page view. But, it will give you further understanding of just how things went wrong on Wall Street.

Flippers, not poor, caused subprime collapse

As Steven Malanga notes (and yes, he's from a hard-right think tank), contrary to myths of both Democrats about poor first-time homeowners AND Republican talking points blaming Fannie, Freddie and the Community reinvestment act, it was, in essence, speculative homebuyers who caused the problem.

Malanga focuses on "flippers." He could have included second-home "investment" buyers, and "apartment renter"-buyers, who treated 2/28s and similar mortgages like leases, but, flippers were certainly the primary portion of the speculative homebuyers.

Read the full story. Even the Manhattan Institute can find an acorn on occasion.

San Diego stupidity in response to subprime crisis

The idea of suing Countrywide, et al to block foreclosures may have a slim chance of success rather than none, but I wouldn’t go any higher than that.

Beyond that, San Diego City Attorney Michael Aguirre appears to be in la-la land:

“We would like to see San Diego become a foreclosure sanctuary.”

So, do we combine that with being an illegal immigrant sanctuary and house illegals in empty houses?

Subprime fallout hits Lehman Brothers

The nation’s fourth-largest investment bank had its first quarterly loss since being spun off in 1994. Why?

Revenue during the quarter suffered from “negative mark to market adjustments and principal trading losses.”

In other words, it had a bunch of mortgage crap on its books, not priced to reality.

Speaking of that, in what is certainly ironic, Moody’s, which contributed to all these problems in the first place, lowered its rating of Lehman’s to negative.

Wachovia cans CEO; what’s next?

In what is surely a sign of the subprime times, Wachovia Corporation CEO G. Kennedy Thompson is out on the street. Thompson had been stripped of his role as chairman of the board a month ago.

But, new chairman Lanty Smith said, “move on, don’t look here,” as in, this doesn’t mean Wachovia has new problems.

I disagree. Canning him without having any idea yet of a replacement has to raise red flags.

And, the warning flags are elsewhere, too.

Yesterday, Washington Mutual board stripped CEO Kerry K. Killinger of his position as chairman of the board. Rumor is he could be pushed out soon, too.

Subprime foreclosures could hit 35 percent

That’s the word from Kenneth Rosen, chairman of the Fisher Center for Real Estate and Urban Economics at the University of California at Berkeley, speaking at an Urban Land Institute gathering in Dallas.

And, he says, we are nowhere near the bottom of the subprime collapse:

He thinks foreclosures could rise as high as 35 percent of all subprime loans in the next 18 months, from 13 percent in late 2007.

Can you say “Holy Shit”?

Rosen expects continued tightness in commercial mortgage lending, too. And, he says odds are about 50-50 the recession will be deep, not mild.

Moody’s as financial manipulation enabler put in the dock

If there’s a person, creature or corporation more to blame for the subprime crunch, the credit-derivatives crunch, and everything else FUBAR about today’s finance situation, it’s Moody’s the not-so-humble bond-rating service.

Having branched beyond bonds into larger credit ratings, it’s quite arguable, as one person puts it in the story, a preview of a New York Times Magazine story for this coming Sunday, that Moody’s, along with Standard & Poor and Fitch’s, moved from “gatekeepers” to “gate openers.”

Arthur Levitt, the former chairman of the Securities and Exchange Commission, charges that “the credit-rating agencies suffer from a conflict of interest — perceived and apparent — that may have distorted their judgment, especially when it came to complex structured financial products.”

No shit. The next couple of webpages of the story read like the financial-world equivalent of politics’ infamous “sausage making” process of legislation.

Here’s stuff Moody’s ignored on one special-purpose vehicle, or SPV:

Moody’s learned that almost half of these borrowers — 43 percent — did not provide written verification of their incomes. The data also showed that 12 percent of the mortgages were for properties in Southern California, including a half-percent in a single ZIP code, in Riverside. That suggested a risky degree of concentration.

And more fun on this same bundle:

In the frenetic, deal-happy climate of 2006, the Moody’s analyst had only a single day to process the credit data from the bank. The analyst wasn’t evaluating the mortgages but, rather, the bonds issued by the investment vehicle created to house them. A so-called special-purpose vehicle — a ghost corporation with no people or furniture and no assets either until the deal was struck — would purchase the mortgages.

In other words, a single guy just spent a business day playing the equivalent of the lotto with a $430 million bundle of papers.

Ironically, if you will, increased federal regulation of things like pension and mutual funds gave Moody’s more things to rate, setting the stage for the dereg hothouse of the late 1990s and on.

Issuers thus were forced to seek credit ratings (or else their bonds would not be marketable). The agencies — realizing they had a hot product and, what’s more, a captive market — started charging the very organizations whose bonds they were rating. This was an efficient way to do business, but it put the agencies in a conflicted position. As (Frank Partnoy, a professor at the University of San Diego School of Law), says, rather than selling opinions to investors, the rating agencies were now selling “licenses” to borrowers. Indeed, whether their opinions were accurate no longer mattered so much. Just as a police officer stopping a motorist will want to see his license but not inquire how well he did on his road test, it was the rating — not its accuracy — that mattered to Wall Street.

Problem is, even before the bubbles started bursting, CDOs were defaulting at a rate higher than traditional bonds, as page 5 notes. But, because a lot of these CDOs were coming from high-volume repeat customers, Moody’s kept the rubber stamp hot.

The Securities and Exchange Commission refused to look at the incestuous nature of the modern credit-rating agency after Enron blew up, despite a directive from Congress. And, of course, in both the House and Senate versions of housing bailout legislation, nobody in Congress is proposing a serious oversight reform bill, not just a nudge to the SEC.

More financial “sausage making” on page 6, from a subprime package called XYZ:

Moody’s monitors began to make inquiries with the lender and were shocked by what they heard. Some properties lacked sod or landscaping, and keys remained in the mailbox; the buyers had never moved in. The implication was that people had bought homes on spec: as the housing market turned, the buyers walked.

By the spring of 2007, 13 percent of Subprime XYZ was delinquent — and it was worsening by the month. XYZ was hardly atypical; the entire class of 2006 was performing terribly. (The class of 2007 would turn out to be even worse.)

But, although Moody’s started re-rating individual mortgage-based bonds by soon after this time, it still didn’t do anything about collateralized debt obligations, or CDOs. And, was using a different set of ratings analysts, and giving ratings without knowing what bonds a particular CDO would buy!

A CDO operates like a mutual fund; it can buy or sell mortgage bonds and frequently does so. Thus, the agencies rate pools with assets that are perpetually shifting. They base their ratings on an extensive set of guidelines or covenants that limit the CDO manager’s discretion.

One misrated CDO was estimated to have a loss potential of 2 percent at the time it was rated triple-A. Latest estimate? At 27 percent; a 16 percent slice of triple-A bonds downgraded all the way to single-B.

It’s clear that only major federal regulation can put this horse back in the barn and keep it there.

If you thought the subprime crisis was bad, get ready for prime time

Get ready for the prime crisis in California. That 10-year doldrums for the housing market could indeed happen, at least in the “Golden” State. Here’s what Mark Gimein says:

The crisis in California is going to get much worse, and there is no bailout that will solve it. Why? Because if the first stage of the foreclosure crisis was about people who could not afford their mortgages, the next stage will be about people who have every reason not even to try to pay their mortgages.

Gimein thinks that prime-mortgaged houses are going to tank so badly many people will start viewing them as walkaways. And, despite preachiness, they’re doing the right thing:

Over the next several months, we're going to be subjected to a chorus of hand-wringing about the moral turpitude of people who walk away from their mortgages and pronouncements like last month's warning from Treasury Secretary Henry Paulson that people should honor their mortgage obligations. The problem with finger-wagging on what you "should" or "ought" to do is that, when it comes to money, you're usually given the lecture only when it's in your interest to do the opposite.

And, yes, it’s that bad in La-La Land. Here’s asking prices on some foreclosures Gimein found:

• In San Bernardino, a house bought for $310,000 in 2005 is now being offered by the bank for $199,900.
• A 2,000-square-foot ranch house in Rancho Santa Margarita is down from $775,000 to $565,000.
• A starter home in Sacramento, sold for $215,000 in 2004, is now down to $129,900.

Now, what does this have to do with prime mortgages?

Gimein notes that many prime borrowers got the prime equivalent of a 2/28 and will also be facing resets. These loans, such as option ARMs, he says, normally hit reset points at about four and a half years. In other words, a lot of prime loans from 2003-04 will be resetting in the next year. And, with the housing drop in California, a lot of prime, as well as subprime, borrowers will be underwater. The average post-reset payment will be almost double the pre-reset amount, Gimein says.

And, California is ground zero for this.

Just two banks, Washington Mutual and Countrywide, wrote more than $300 billion worth of option ARMs in the three years from 2005 to 2007, concentrated in California. Others — IndyMac, Golden West (the creator of the option ARM, and now a part of Wachovia) — wrote many billions more. The really amazing thing is that the meltdown in California is already happening and virtually none of these loans have yet reset.

Gimein says that, looking at the current version of the subprime bailout plan wending its way through Congress, that if California prime housing prices drop 40-60 percent, there will be no way to craft a prime-option mortgage bailout plan that is even close to “fair” for both lenders and borrowers.

Gimein notes that, especially if you’re on an original mortgage and not a refi, you could be lucky:

The luckiest of those are the ones who used option ARMs to buy a house. For them, walking away is easy: Their loans are "nonrecourse," and the lenders can't go after them for more than the value of the house. The choice is harder for those who used the loans to refinance. The quirks of real-estate law regarding refi loans make it possible (though not necessarily easy) for lenders to try to get back more money even after taking the house.

Of course, a bunch of walkaways will depress the market even further, and incite more anger among people stuck with refis.

And that, my friends, is why Henry Paulson is wagging his finger at the bidding of his old financial sector buddies.

As for “killing” your credit rating by walking away? Gimein says we used to have the same fears over credit cards, and look at today. In other words, if somebody wants to sell you a house, they will.

So, walk away. And let the moral squabbling begin.

Greenspan lied, mortgages died

That’s the nickel version of St. Alan of Greenspan defending his record as Federal Reserve chairman.

But, others such as former vice-chair Alan Blinder, beg to differ:

“Lending standards were being horribly relaxed, and the Fed should have done something about that, not to mention about deceptive and in some cases fraudulent practices. This was a corner of the credit markets that was allowed to go crazy. It was populated by a lot of people with minimal financial literacy who were being sold bills of goods by mortgage salesmen.”

Former Fed governor Ned Gramlich agreed last year:

“This whole subprime experience has demonstrated that taking rates down could have some real costs, in terms of encouraging excessive subprime borrowing." There was “a giant hole in the supervisory safety net. . . . It is like a city with a murder law but no cops on the beat.”

Greenspan defended the boom in subprime mortgages as “worth the risk.”

I guess that includes the risk of lowering banks’ marginal requirements and not regulating them. Not to mention non-bank mortgage brokers.

Ben Stein: subprime idiot or subprime liar?

You make the call, based on this either contrarian or idiotic New York Times column.

My vote is for “liar.” Ben Stein isn’t that stupid.

Given his serious GOP work started in the Nixon Administration, though, it is clear Stein is easily that much of a liar.

We’re mad as hell and we’re suing over subprime fraud

The rate of subprime-related lawsuits currently exceeds 1980s S&L-related lawsuits.

“What they can't enforce through regulation, they will try to accomplish through suing,” said David Bizar, a Hartford, Conn.-based attorney with the firm McCarter & English who defends against subprime mortgage lawsuits brought by consumers and regulators.

Already, the number of subprime-related cases filed in federal courts is outpacing the rate of litigation that emerged from the savings and loan meltdown in the late 1980s and early '90s, according to a study released Thursday.

The 278 subprime cases filed in federal courts in 2007 already equals half of the total 559 S&L cases handled over multiple years, according to the findings from Navigant Consulting Inc.

For that, I have but one word: Good. Let’s get more. The article notes that the pound of flesh federal and state regulators exact from Wall Street financial institutions isn’t likely to be too onerous, so we need to gin up lawsuits.

Subprime solution: Extend and expand Section 8?

That’s essentially the solution of Richard Bove, an analyst at Punk Ziegel & Co:

Bove proposes refinancing subprime borrowers with government-backed loans at an interest rate of 1 percent. …

Under the plan, the Federal Housing Administration would guarantee the loans and the banks would pay off all outstanding housing debt on the home. The new loan would be bought by the Government National Mortgage Association, or Ginnie Mae. Ginnie Mae would then repackage the loans into a bond paying a market yield. Bove throws out 6 percent as a possibility.

The difference between the actual 1 percent payout on the loans and the 6 percent paid by the new securities would be covered by the government. Taxpayers, in turn, would pay about $150 billion as part of the bailout.

“The cost may sound high, but it is not,” Bove wrote in an argument for the plan. “Compare it to the cost of rebuilding New Orleans below sea level or the cost of the Middle Eastern Wars. It is not high relative to these expenditures. The result is far different, however.” …

Like any reasonable proposal out there, Bove’s isn't going to save everyone. He proposes that refis are offered only to homeowners whose loan payments will be at most 30 percent of their income. He also wants borrowers to live in the home for a minimum of five years.

If the plan sounds familiar, it’s because Bove is simply trying to extend the government's Section 8 housing program to people who would otherwise not qualify.

I’m OK with the general idea, but not that big a spread on the interest rates. I think banks and other mortgage institutions ought to eat more of the losses they created — they need to suffer as a reminder.

Using Bove’s analogy, Katrina was an “act of God”; the subprime crisis, not — maybe an “act of Greenspan,” but that’s a whole nother story.

And, the true progressive in me says fines, garnishing excessive financial institution CEO pay or similar ideas would be a better finance mechanism than straight-up taxpayer dollars.

I’m also upset that among the myriad of subprime fix ideas, even the progressive Center for American Progress is not, apparently, proposing “linkage” of a subprime fix/bailout to new regulatory legislation.

And where was the Fed with these lending controls five years ago?

If St. Alan Greenspan had proposed these checks on subprime lending, especially unscrupulous subprime lenders, we never would have had the housing bubble, followed by collapse, we’re now facing.

The Fed NOW, finally, is considering:

_restricting lenders from penalizing certain subprime borrowers — those with tarnished credit or low incomes — who pay off their loans early. The restriction would apply to loans that meet certain conditions, including that the penalty expire at least 60 days before any possible payment increase.

_forcing lenders to make sure that subprime borrowers set aside money to pay for taxes and insurance.

_barring lenders from making loans when they don't have proof, or verification, of a borrower's income.

_prohibiting lenders from engaging in a pattern or practice of lending without considering a borrower's ability to repay a home loan from sources other than the home's value.

Heck, if some other Fed governor had proposed these ideas five years ago, St. Alan probably would have ignored him or her.

But, anointed by Republicans and DLC/Clintonite Democrats, he was able to get away with economic adventurism.

Subprime crisis hits Narvik, Norway?

You read right. Narvik and other towns in Norway had their municipal governments invested in CDO-type securities. The four communities may have lost as much as $64 million or even more. It’s bad enough that Narvik, population 18,000, has missed one city payroll.

“The people in City Hall were naïve and they were manipulated,” said Paal Droenen, who was buying fish at a market across the street from the mayor’s office. “The fund guys were telling them tales, like, ‘This could happen to you.’ It’s a catastrophe for a small town like this.”

Now, the towns are considering legal action against the Norwegian brokerage company, Terra Securities, that sold them the investments. They allege that they were duped by Terra’s brokers, who did not warn them that these types of securities were risky and subject to being cashed out, at a loss, if their market price fell below a certain level.

“When you sell something that is not what you say it is, that is a lie,” Mayor Karen Kuvaas said. She disputed the suggestion that people here lacked the sophistication to understand what they were buying. “We’re not especially stupid because we live so far in the north,” she said.

Norway’s financial regulator agreed that the brokers had misled the towns, and it revoked the license of Terra Securities, prompting the company to file for bankruptcy. But the company’s parent, Terra Group, which is in turn owned by 78 savings banks and remains in business, rejected calls for it to compensate the towns. A spokesman for the group said it too had taken a hit from the episode.

Norway’s finance minister, Kristin Halvorsen, has ruled out the possibility of a state bailout, and Citigroup, which announced Thursday that it would shut down one of the money-losing investments Narvik bought, said it had no legal obligation to step in.

Narvik has investments like this equal to about one-quarter its annual budget. The problem seems to have been created in part by city officials who didn’t read original documents thoroughly, and in at least equal part by Citigroup and others who added fine print after the initial documents were signed.

I wouldn’t be surprised to see Citigroup sued in Norwegian court before this sorry episode is over.

Wonder if any American mortgage lenders did this?

Beleaguered British lender Northern Rock put two-thirds of its mortgage portfolio into a separate offshore company. (The Channel Islands serve the same purpose in the U.K. that Bermuda and the Bahamas do here.) Given the way offshore entities have proliferated here in the U.S., I’m actually surprised we haven’t heard about this yet in our mortgage lending industry.

If we do here about something like this year, the subprime market will surely take an even more massive cratering.