Article by Neil Garfield from livinglies.wordpress.com
“it follows that the investors are the ONLY parties with standing to make any claim on the mortgage, note or obligation. But they won’t make that claim because of the exposure to risk that could leave them with even more loss than the current loss on their investment. This leaves trillions of dollars in unclaimed proceeds. The question is who should get it. Obviously it was the financially sophisticated intermediaries who were able to step in and bluff the court system and recording offices into accepting fraudulent, fabricated and forged documentation.
98% of the foreclosures end up with these intermediaries getting title to property that they never financed and were handsomely paid for handling at one point or another.
50%-60% of “modifications end up in foreclosure anyway. Even with good payment terms a $300,000 mortgage on a $150,000 piece of property is not appealing to even the least sophisticated borrower.”
Today’s NY Times report on Quants, if you read it carefully, will tell you a lot about how Wall Street almost pulled off the perfect crime. In fact, the complexity of the derivatives they created and the complex structure of personnel involved in their creation and valuation created a level of plausible deniability beyond the reach and beyond the comprehension of the newbie B-School graduates sitting at regulatory agencies, not having the faintest idea what they were looking at. Small wonder, Greenspan admitted that he didn’t understand them either but did nothing in 2005 because he was afraid of a global economic collapse, high unemployment, crashing industries and a general swoon in asset prices from housing to stocks. In hindsight he and everyone else admits we would have been far better off if we had bitten the bullet then than now. By allowing the problem to grow the fall was longer and deeper.
At the heart of the “complexity” (read that “lie”) was the use of computer algorithms that took spreadsheet projections to levels of “sophistication” never seen before. The result was that when a computer spit out a value for mortgage backed securities, it was impossible to audit by hand without perhaps 200 PhD’s spending the better part of a decade working it out in committees. So Wall Street got to create something that was treated as the equivalent of money and the value of this money was whatever Wall Street said. And with a little slight of hand with the rating agencies and false insurance policies from an entity (AIG) that couldn’t make good on the insurance, nobody questioned it because EVERYONE looked like they were making a ton of money.
In truth only the intermediaries were making money. Much like the stockbroker who churns an account making transaction fees until there is nothing left in the account and then moving on to the next victim. The Wall Street firms, whose stocks were traded publicly, had no risk whatsoever. They were essentially capitalized by investors in their stock, investors (Customers) in their financial products and when they found this opportunity, struck the mother load – everyone wanted a higher return and greater safety – at least that its how it was sold.
The Wall Street firms were quick to report their earnings because bonuses and stock options were directly affected and stockholders were happy with rising value of their investments in Wall Street firms. But those profits were in reality the proceeds of fraud and theft. And they were not disclosed to the borrowers contrary to the Truth in Lending Act. In a Machiavellian way, they were brilliant in this strategy – they were not even the issuers of the securities. The issuers were the people at a “loan closing” far away who were executing documentation that turned out to be used as the negotiable instruments that were later sold as unregulated securities. The fact that the notes were rendered non-negotiable and that pooling of the notes resulted in a loss of identity of the note which made the note unsecured, was possibly unknown but definitely irrelevant to the “masters of the universe” on Wall Street.
The end result was that the “borrowers”/issuers did not know what they were doing, who they were dealing with, what their real cost was on the deal (especially with inflated appraisals, much the same as inflated appraisals of the mortgage backed securities), and who was getting paid. It was a securities deal usually coupled with several financial products which takes them out of the realm of any “exemption” from Truth in Lending requirements. Thus the investors, who did not know what they were buying, are left with less than zero just as the borrowers are left with less than zero. Both are underwater and neither will ever completely recoup their investments regardless of any stimulus or quantitative easing from central banks.
Despite the computer driven valuations that were produced, the real value was zero for both investors and “borrowers”/issuers. And now the investors are log-jammed into a place where they either eat the entire loss or find a way to recover from the intermediaries. They can’t actually make a claim against the borrowers because even if they successfully established their status as holders in due course, that would mean they were taking the chance of being hit with all the defenses, claims and counterclaims under TILA, deceptive lending, securities violations, rescission, treble damages, usury and so forth. So investors are not making the claims – even when they are clearly identified as a single hedge fund. They are suing Countrywide or other intermediaries trying to recoup their bad investments from the group (the intermediary servicer, trustee or other interloper) who have no defenses, claims and counterclaims and who have no basis for claiming treble damages, interest, attorney fees and court costs.
This has left a void – the only parties who are actually losing money are the investors and borrowers who are now under water because of the inflated appraisals and tricky mortgage terms that were not disclosed. It goes without saying that under the single transaction doctrine, neither the investor nor the borrower would have ever made their part of the deal if there had been full disclosure of all of the above. That’s called fraud. Since the investors are the only parties who could claim they are losing money from “non-payment” on the note (assuming they were not paid by AIG, Federal bailout, other insurance or cross collateralization) it follows that the investors are the ONLY parties with standing to make any claim on the mortgage, note or obligation. But they won’t make that claim because of the exposure to risk that could leave them with even more loss than the current loss on their investment. This leaves trillions of dollars in unclaimed proceeds. The question is who should get it. Obviously it was the financially sophisticated intermediaries who were able step in and bluff the court system and recording offices into accepting fraudulent, fabricated and forged documentation. And they are getting their way. 98% of the foreclosures end up with these intermediaries getting title to property that they never financed and were handsomely paid for handling at one point or another.
THIS is why “borrower” should stand up and fight. The windfall here is to thieving companies who were already paid. If inequality is largely accepted as being at least partially responsible for the current financial crisis and if these intermediaries are not necessary to the health of the financial system (servicers, trustees etc.) then clearly the correction of that inequality, trillions of dollars, should move to the homeowners who were the victims of fraud and whose identities and signatures were used to create vast amounts of profits off of transactions that were falsely presented to both sides. With equity restored to homeowners and the end of foreclosures and declining home prices, perhaps a deal could be struck between the investors who lost out and then homeowners who now have their houses free and clear, so that the credit system could be restored with trust and confidence.
Awesome blog! Great info, nice layout, well authored. Keep up the great work!