The Law Office of Carol A. Molloy

Today, October 31, 2010, 36 minutes ago | genesis Of perhaps, more-broadly, the entire housing bubble and collapse. Even before some of the nation’s biggest mortgage lenders were forced to suspend foreclosure proceedings because of faulty paperwork, it was becoming clear that the Obama administration’s year-old effort to pump life into the housing market was falling short. It wasn’t “falling short.” It was intentionally designed to produce lots of pretty colored candy in the form of “Hopium” but never actual results. HAMP and its pals never came with any sort of teeth in the form of actual punishment for non-compliance by the financial industry, and thus we have seen lots of things like this: ■Homeowners being told not to pay – on purpose – so as to “qualify” for help. They are then denied a modification. ■Homeowners who are put on trial plans but then send documents two, three, four or more times – with certified mail return receipts – and their servicers claim they “lost” them. Never mind that the homeowner has signature proof they were delivered. There is then no legal enforcement of that receipt – even though under virtually every form of legal agreement known to man a return receipt is proof of notice being received. ■Homeowners who are strung along for months on “trials” and then denied a permanent modification. When the denial is rendered the entirety of the difference between the original payment and the trial is immediately due and payable, plus late fees and penalties for not making the original payments! This happens even though the homeowner is paying as directed on the trial modification. ■Homeowners who are foreclosed on while on trials that allegedly are intended to “save their homes.” If true modifications – that is, real help – were the point of this entire exercise, rather than jerking people off and milking them for even more money when they can’t pay, these actions would have exposed the servicers involved to severe financial penalties. They haven’t. An even bigger source of worry is the $426 billion in so-called second liens — home equity loans, second mortgages and other loans “junior” to the primary mortgage — that sit on the balance sheets of Bank of America, JPMorgan Chase, Wells Fargo and Citigroup. The nation’s four biggest banks report that less than 4.5 percent of these loans are delinquent, according to Weiss Ratings. But some mortgage finance analysts like Joshua Rosner of Graham Fisher & Co remain skeptical. “Are the second liens properly reserved for? The banks say they are but that’s debatable,” said Rosner. Debatable? That’s laughable. 70% of the dollar volume of HELOCs is in the so-called “Sand States” – California, Nevada, Arizona and Florida. All of those loans behind an underwater first that is not being paid are in fact worth zero if the first forecloses. Why? Because the first has priority – and the HELOC gets nothing on a foreclosure until the entire balance of the first mortgage has been paid. Then we have seconds that have not been reaffirmed in bankruptcy – and are discharged – but the servcicers are sending monthly statements to the homeowner! They’re not “demanding” payment – but it’s damn sleazy to attempt to get someone to reconfirm a debt by making even a small payment against it without warning the consumer that’s what they’d be doing. Of course there is no such warning enclosed; I’ve seen some of these “statements.” Reuters found that after talking to nearly two-dozen housing experts, mortgage traders, lawyers, securities experts and others, there is broad agreement about what a solution to the mortgage crisis might look like. They say a fix must allow many borrowers to stay in their homes, compensate disgruntled mortgage investors and allow banks to take write down loans without causing a repeat of the financial crisis of 2008. Oh, so we can’t make the banks pay for their sins? It’s not enough that they defrauded people up front by making loans they knew were no good and sold them on to investors. We have to protect them from the consequences of that act, lest we “repeat the financial crisis of 2008.” The standoff between banks, borrowers and bond investors benefits few. The only ones who stand to gain from such recalcitrance are the bloggers, pundits and polemicists who throw around catcalls like “banksters” to describe Wall Street bankers and “freeloaders” to describe borrowers who have stopped making mortgage payments. What do you call someone who makes knowingly bad loans and then sells them to investors while actively concealing that they’re crap? This is not an “allegation” – it has been testified to – voluntarily – under oath. How many times do we have to do this? These mortgages were sold to Fannie Mae, Freddie Mac and other investors. Although we did not underwrite these mortgages, Citi did rep and warrant to the investors that the mortgages were underwritten to Citi credit guidelines. In mid-2006 I discovered that over 60% of these mortgages purchased and sold were defective. Because Citi had given reps and warrants to the investors that the mortgages were not defective, the investors could force Citi to repurchase many billions of dollars of these defective assets. This situation represented a large potential risk to the shareholders of Citigroup. I started issuing warnings in June of 2006 and attempted to get management to address these critical risk issues. These warnings continued through 2007 and went to all levels of the Consumer Lending Group. We continued to purchase and sell to investors even larger volumes of mortgages through 2007. And defective mortgages increased during 2007 to over 80% of production. Is that clear enough? This is sworn testimony, and incidentally, there is attached a copy of an email that was sent to the Board on the matter. It was quite clear and unambiguous. That we are still arguing over “everyone giving a bit” is an outrage. This was quite-clearly intentional conduct since it continued beyond where these warnings were issued. Since when do you get to rob people and say “oh, well, we’ll share the loss”? “To ultimately resolve this, you are going to have to come up with some solution for the second liens the banks own,” said Bill Frey of Greenwich Financial Services, a firm that specializes in mortgage investing and which has been at the forefront of fighting for the rights of institutional investors. “No one wants the banks to fail, but the banks are going to have to write down second liens.” I want the banks to fail. I want those who made the crap loans to eat them. I want those who are sitting on losses and fraudulently claiming they are “money good” to recognize the truth. I want regulators, accountants, and auditors to force this into the open. I want to know how much the damage actually is, because until we admit to it and clear it we cannot have a true economic recovery, as the proper clearing price for homes cannot be reached. We will thus sit in a quagmire with all sorts of monetary and fiscal games being played which will continue to distort the markets and prevent a true economic recovery from taking place. “We’re years late in dealing with this and that has made the problem much worse,” said Janet Tavakoli, a Chicago-based derivatives consultant who has been a long-time critic of the way banks packaged and sold mortgage bonds during the housing boom. “Entire neighborhoods are devastated and many innocent homeowners with sound mortgages are underwater.” Now this I disagree with – although in general Janet and I do agree. What do I disagree with? The premise that “innocent homeowners with sound mortgages are underwater.” No they’re not. The homeowner who bought into a fraud-induced bubble may be personally innocent, but their mortgage was not and is not sound. It was written for an unsupportable value and backed by an unsupportable appraisal. Said appraisal failed to take into account the ramp job in prices that was driven by speculative fervor and the prevalence of loan products that were impossible to pay as agreed. That the borrower/buyer didn’t know this doesn’t change the fact that the loan was unsound at origination – it only defines who’s fault it is that the loan was originated in the first place. The fact of the matter is that if you bought a house during the bubble you overpaid for it. You overpaid because banks, appraisers and financial firms on Wall Street, including most particularly those who were securitizing loans they knew were crap, as Citibank’s former chief underwriter has admitted to under oath, caused those price ramps. You overpaid and your loan was thus unsound as it was not backed by the collateral claimed even if you personally are blameless. Those in the “industry” misled you, and while some of them may have been duped themselves it is now a matter of sworn testimony that at minimum the sellers of the money knew what they were doing was unsupportable and wrong. That’s right America – you were fleeced. Even those of you who didn’t use “Liar Loans” and other exotic products, who didn’t treat your house as an ATM, and who didn’t play games with your income and other financials. You were ripped off by all those who did, and more importantly, those who enabled them, which are the nation’s largest financial institutions. This is not speculation or arithmetic that arrives at an indisputable conclusion. It is now sworn testimony by former executives backed up with documents sent to top corporate management. It is now fact. The alternative of doing nothing and waiting for the economy to bail out the housing market seems dim. The true alternative is to force these institutions to eat the crap they tried to foist off on others. If this causes them fail, then so be it. They have it coming – they caused this, and they should not get away with it. “Share the pain” sounds great – until you realize that what this really means is that those who did nothing wrong but bought a bubble house will get hosed for tens or even hundreds of thousands of dollars. Pension funds – that is, you – will get hosed for huge amounts of money as a consequence of buying something not based on speculative fervor, but because the seller of that financial product lied about what was contained in it. This will hurt you even if you never bought or sold a house during that time period at all. The fact is that without the money flow provided by these knowingly-bad loans the bubble could not have inflated to anywhere near the degree it did, and by 2006, it was documented that at least one of the largest banks in the nation knew they were both making and reselling trash – while claiming it was all “AAA” grade and perfectly good paper. We must not allow them to get away with it; the entirety of this fiasco must fall on those who were responsible for making – not just allowing – it to happen.