DailyFinance.comhttp://www.dailyfinance.comDailyFinance.com%http://www.blogsmithmedia.com/BlogURL%/media/feedlogo.gifDailyFinance.comhttp://www.dailyfinance.comen-usCopyright 2012 Weblogs, Inc. The contents of this feed are available for non-commercial use only.Blogsmith http://www.blogsmith.com/Don't Ask, Just Cram: It's Time to Put Mortgage Modifications Back into Judges' Handshttp://www.dailyfinance.com/2011/04/06/cram-down-mortgage-modifications-judges-banks-underwater-bankruptcy/http://www.dailyfinance.com/2011/04/06/cram-down-mortgage-modifications-judges-banks-underwater-bankruptcy/http://www.dailyfinance.com/2011/04/06/cram-down-mortgage-modifications-judges-banks-underwater-bankruptcy/#commentsFiled under: , ,

Cram Downs: Let Judges Modify Mortgages AgainMany state attorneys general, federal law enforcers and regulators say they want big banks to pay for their fraudulent foreclosures and abusive mortgage servicing practices by reducing what borrowers owe them by some $20 billion. That's the amount the banks allegedly saved by doing a lousy job servicing troubled mortgages. (That math is questionable at best, Yves Smith noted when that figure began making the rounds.)

But the solution to this problem is not a settlement with the banks that mandates principal write-downs. Principals on these loans should be reduced, but it should be done in the most efficient, effective way: Congress should give bankruptcy judges back a power they once had -- the right to reduce the principal on a mortgage to the home's current market value. In other words: Bring back the cram down.

Reducing mortgage principals to homes' current market value is critical step to healing our economy. First, it would stop many foreclosures because borrowers would be able to afford to keep their homes. Reducing foreclosures would preserve property values and cut back on a big source of the oversupply in the housing market. Moreover, after cram downs, people could more easily sell their homes and move to where jobs are. Sales wouldn't be "short" anymore. Finally, in a post-cram-down America, people would have more disposable income, which would allow discretionary consumer spending to rise.

Why Voluntary, Bank-Run Modification Programs Fail

So why shouldn't regulators simply include write downs in the settlement between law enforcement and the banks? Because the Home Affordable Modification Program has shown that any system that relies on banks to chose among borrowers and design their modifications will fail. Back in the 1980s, this country experienced a similar failure of voluntary programs to solve a huge problem with underwater mortgages triggered by the popping of an agricultural real estate bubble.

As the Federal Reserve Bank of Cleveland explained in its analysis of what happened then to family farms:

"Many farmers, like many homeowners now, were in danger of losing their primary residences, with little prospect of relief under the bankruptcy options available to farmers at that time....

Moratoriums on foreclosures in a number of farm states slowed the rising tide of farm foreclosures somewhat, but they provided only a temporary reprieve as the fundamental economic factors ... left many farmers unable to service their existing debt and with almost no possibility of renegotiating their secured loans with creditors....

...voluntary modification efforts, even when subsidized by the government, did not lead agricultural lenders to negotiate loan modifications."

That phrase "with little prospect of relief under the bankruptcy options available" is key. Our current bankruptcy laws allow debtors in bankruptcy to force banks to reduce the principal on most loans secured by property to the current market value of that property, but not all.

For example, if a debtor owes $500,000 on a yacht that's now worth $300,000, the debtor can keep the yacht by paying every penny of the $300,000, and as much of the rest as the bankruptcy process allows. Ditto for a limo. More to the point, bankruptcy judges can "cram down" the principal on mortgages securing vacations homes and investment properties -- but for the most common mortgage of all, the one securing the loan on a person's primary residence, they cannot.

A Solution That Has Worked Before

At least, not anymore. Home mortgages could be crammed down nationwide until 1978, when Congress changed the rules. Even after that, thanks to disagreement among courts on how to interpret the rule change, they could be crammed down in some parts of the country until a 1993 Supreme Court decision ended the practice completely.

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In the 1980s, the Cleveland Fed explained, the bankruptcy code didn't let allow family farm mortgages to be crammed down either. But when voluntary programs failed, Congress created special bankruptcy law provisions to authorize farm cram downs. Then, as now, reported the Cleveland Fed, the banks warned of financial doomsday, saying cram downs "would flood bankruptcy courts, permit abuse by borrowers who could afford to pay their loans, and reduce the availability of credit, among other things." None of those things happened.

Instead, the cram down law "worked without working": It was rarely used actively, but banks sustainably modified mortgages anyway. As soon as borrowers had leverage -- negotiating with the threat of a cram down behind them -- banks started cutting meaningful deals.

To be fair to then-Speaker Nancy Pelosi's House of Representatives, it passed a cram down bill in 2009. But the Senate failed to get the job done, as President Obama and some powerful groups like MoveOn.org and labor unions largely sat that fight out.

How Banks Beat Back Cram Downs

What was the argument that the banking lobby used to kill the bill?

Surely it wasn't the claptrap about "moral hazard." Unlike the banks and their executives bailed out by the taxpayers, homeowners aren't "encouraged" by a principal reduction "bailout" to make increasingly risky, self-interested decisions, secure in the knowledge the the government will save their bacon if it falls in the fire again. That's behavior by bankers is a real and present hazard to our financial system.

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The only specific "hazard" the anti-principal mod lobby mention is that borrowers who are current will default to get mortgage modifications. There's one big problem with that claim: Mortgage servicers have routinely been telling borrowers who are current that they will have default before they can get help. These are borrowers who were blowing through their savings struggling to stay current on their underwater mortgages, and were reaching out before default to work something out with their banks -- responsible borrowers.

The practice of telling these people to default before a modification could even be discussed has become so common that both the state attorneys general's proposed settlement with mortgage servicers and the banks' much weaker counteroffer address the issue. This alone makes a mockery of any potential argument about the bad moral consequences of allowing judges to make principal modifications.

And doing the reductions via the bankruptcy code also reduces any incentive to default to get help. Borrowers don't -- and shouldn't -- take bankruptcy lightly.

Fears of Another Financial Industry Meltdown

So what was the argument the bank lobby really used to kill the cram down bill in 2009? I don't know, but one type of financial doomsday lurks in the background now that didn't in the 1980s: Bank Bailout II. Mortgage principal write downs in large numbers could push some big banks over the edge -- or force them to reveal their present insolvency.

The question is whether enough consumers to bring on that dreaded scenario are willing to face the long, punitive process that is bankruptcy to get mortgage principal write-downs. That begs a second question: If large numbers of write downs led banks to demand another bailout, would they get it? Both are impossible to answer, but the gains are well worth the risks.

If restoring the cram down induces a consumer-bankruptcy-driven financial system failure, that's an important reality check. The nation would have to face the fact that TARP had failed to get the job done, and that it was time to either fix the big banks' balance sheets for real, or shut them down. It would prove that we can't continue to engage in policy theater such as HAMP or leaving mortgage modifications to the discretion of lenders.

Whatever the outcome for banks, Washington needs to suck it up and start instituting good policy.


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]]>attorneys generalbank settlementbankruptcybankruptcy courtbanksbig bankscram downsforeclosure crisisforeclosure fraudforeclosure preventionForeclosuresGOPhamphome loan modificationshome priceshomeownershousing marketjudgesmortgage modificationmortgagesmroal hazardprincipal reductionreal estate bubblerepublicansshort saleswall streetAbigail FieldWed, 06 Apr 2011 12:00:00 ESTCourt: Busted Securitization Prevents Foreclosurehttp://www.dailyfinance.com/2011/04/01/court-busted-securitization-prevents-foreclosure/http://www.dailyfinance.com/2011/04/01/court-busted-securitization-prevents-foreclosure/http://www.dailyfinance.com/2011/04/01/court-busted-securitization-prevents-foreclosure/#commentsFiled under: , ,

On March 30, an Alabama judge issued a short, conclusory order that stopped foreclosure on the home of a beleaguered family, and also prevents the same bank in the case from trying to foreclose against that couple, ever again. This may not seem like big news -- but upon review of the underlying documents, the extraordinarily important nature of the decision and the case becomes obvious.

No Securitization, No Foreclosure

The couple involved, the Horaces, took out a predatory mortgage with Encore Credit Corp in November, 2005. Apparently Encore sold their loan to EMC Mortgage Corp, who then tried to securitize it in a Bear Stearns deal. If the securitization had been done properly, in February 2006 the trust created to hold the loans would have acquired the Horace loan. Once the Horaces defaulted, as they did in 2007, the trustee would have been able to foreclose on the Horaces.

And that's why this case is so big: the judge found the securitization of the Horace loan wasn't done properly, so the trustee -- LaSalle National Bank Association, now part of Bank of America (BAC) -- couldn't foreclose. In making that decision, the judge is the first to really address the issue, head-on: If a screwed-up securitization process meant a loan never got securitized, can a bank foreclose under the state versions of the Uniform Commercial Code anyway? This judge says no, finding that since the securitization was busted, the trust didn't have the right to foreclose, period.

Since the judge's order doesn't explain, how should people understand his decision? Luckily, the underlying documents make the judge's decision obvious.

No Endorsements

The key contract creating the securitization is called a "Pooling and Servicing Agreement" (pooling as in creating a pool of mortgages, and servicing as in servicing those mortgages.) The PSA for the deal involving the Horace mortgage is here and has very specific requirements about how the trust can acquire loans. One of the easiest requirements to check is the way the loan's promissory note is supposed to be endorsed -- just look at the note.

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According to Section 2.01 of the PSA, the note should have been endorsed from Encore to EMC to a Bear Stearns entity. At that point, Bear could either endorse the note specifically to the trustee, or endorse it "in blank." But the note produced was simply endorsed in blank by Encore. As a result, the trust never got the Horace loan, explained securitization expert Tom Adams in his affidavit.

But wait, argued the bank, it doesn't matter if if the trust owns the loan -- it just has to be a "holder" under the Alabama version of the UCC (Uniform Commercial Code), and the trust is a holder. The problem with that argument is securitization trusts aren't allowed to simply take property willy-nilly. In fact, to preserve their special tax status, they are forbidden from taking property after their cut-off dates, which in this case was February 28, 2006. As a result, if the trust doesn't own the loan according to the PSA it can't receive the proceeds of the foreclosure or the title to the home, even if it's allowed to foreclose as a holder.

Holder Status Can't Solve Standing Problem

Allowing a trust to foreclose based on holder status when it doesn't own the loan would seem to create yet another type of clouded title issue. I mean, it's absurd to say the trust foreclosed and took title as a matter of the UCC, but to also have it be true that the trust can't take title as a matter of its own formational documents. And what would happen to the proceeds of the foreclosure sale? That's why people making this type of argument keep pointing out that the UCC allows people to contract around it and PSAs are properly viewed as such a contracting around agreement.

I'm sure the bank's side will claim the judge was wrong, that he disagreed with another recent Alabama case that's been heavily covered, US Bank vs. Congress. And there is a superficial if flat disagreement: In this case, the judge said the Horaces were beneficiaries of the PSA and so could raise the issue of the loan's ownership; in Congress the judge said the homeowners weren't party to the PSA and so couldn't raise the issue.

But as Adam Levitin explained, the Congress decision was procedurally weird, and as a result the PSA argument wasn't about standing, as it was in Horace and generally would be in foreclosure cases (as opposed to eviction cases, like Congress). And what did happen to the Congress proceeds? How solid is that securitization trust's tax status now anyway?

In short, in the only case I can find that has ruled squarely on the issue, a busted securitization prevents foreclosure by the trust that thinks it owns the loan. Yes, it's just one case, and an Alabama trial level one at that. But it's still significant.

Homeowners Right to Raise Securitization Issue

As far as right-to-raise-the-ownership issue, I think the Horace judge was just being "belt and suspenders" in finding the homeowners were beneficiaries of the PSA. Why do homeowners have to be beneficiaries of the PSA to raise the issue of the trust's ownership of their loans? The homeowners aren't trying to enforce the agreement, they're simply trying to show the foreclosing trust doesn't have standing. Standing is a threshold issue to any litigation and the homeowners axiomatically have the right to raise it.

As Nick Wooten, the Horaces' attorney, said:
"This is just one example of hundreds I have seen where servicers were trying to force through a foreclosure in the name of a trust that clearly had no interest in the underlying loan according to the terms of the pooling and servicing agreement. This conduct is a fraud on the borrower, a fraud on the investors and a fraud on the court. Thankfully Judge Johnson recognized the utter failure of the securitization transaction and would not overlook the fact that the trust had no interest in this loan."
All that remains for the Horaces, a couple with a special needs child and whose default was triggered not only by the predatory nature of the loan, but also by Mrs. Horace's temporary illness and Mr. Horace's loss of overtime, is to ask a jury to compensate them for the mental anguish caused by the wrongful foreclosure.

Perhaps BofA will just want to cut a check now, rather than wait for that verdict. (As of publication BofA had not returned a request for comment.)

No one is suggesting the Horaces get a free house; they still owe their debt, and whomever they owe it to has the right to foreclose on it. Wooten explained to me that the depositor --in this case, the Bear Stearns entity --i s probably that party. Moreover if the Horaces wanted to sell and move, they'd have to quiet title and would be wise to escrow the mortgage pay off amount, if that amount can be figured out. But for now the Horaces get some real peace, even if a larger mess remains.

Much Bigger Than A Single Foreclosure

The Horaces aren't the only ones affected by the issues in this case.

Homeowners everywhere that are being foreclosed on by securitization trusts -- many, many people -- can start making these arguments. And if their loan's PSA is like the Horaces, they should win. At least, Wooten hopes so:
"Judge Johnson stopped a fraud in progress. I am hopeful that other courts will consider more seriously the very serious issues that are easily obscured in the flood of foreclosures that are overwhelming our Courts and reject the systemic and ongoing fraud that is being perpetrated by the mortgage servicers. Until Courts actively push back against the massive documentary fraud being shoveled at them by mortgage servicers this fraudulent conduct will not end."
The issues stretch past homeowners to investors, too.

Investors in this particular mortgage-backed security, take note: What are the odds that the Horace note is the only one that wasn't properly endorsed? I'd say nil, and not just because evidence in other cases, such as Kemp from New Jersey, suggests the practice was common. This securitization deal was done by Bear Stearns, which other litigation reveals was far from careful with its securitizations. So the original investors in this deal should speed dial their lawyers.

And investors in bubble-vintage mortgage backed securities, the ones that went from AAA gold to junk overnight, might want to call their attorneys too; this deal was in 2006, and in the securitization frenzy that followed processes can only have gotten worse.

Some investors are already suing, but the cases are at very early stages. Nonetheless, as cases like the Horaces' come to light, the odds seem to tilt in investors' favor -- meaning they seem increasingly likely to ultimately succeed in forcing banks to buy back securities or pay damages for securities fraud connected with their sale. And that makes the Bank Bailout II scenario detailed by the Congressional Oversight Panel more possible.

The final, very striking feature of this case is what didn't happen: No piece of paper covered in the proper endorsements --an allonge -- magically appeared at the eleventh hour. The magical appearance of endorsements, whether on notes or on allonges, has been a hallmark of foreclosures done in the robosigning era. And investors, as you pursue your suits based on busted securitizations, that's something to watch out for.

My, but the banks made a mess when they forced the fee-machine of mortgage securitizations into overdrive. The consequences are still unfolding, but one consequence just might be a whole lot of properties that securitization trusts can't foreclose on.


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]]>economyforeclosure crisisforeclosureshomeshousingreal estatesecuritizationAbigail FieldFri, 01 Apr 2011 18:25:00 ESTPayday Loans Exposed: How 'Short-Term' Lenders Create Long-Term Troubleshttp://www.dailyfinance.com/2011/03/31/payday-loans-exposed-short-term-lenders-borrowers/http://www.dailyfinance.com/2011/03/31/payday-loans-exposed-short-term-lenders-borrowers/http://www.dailyfinance.com/2011/03/31/payday-loans-exposed-short-term-lenders-borrowers/#commentsFiled under: , ,

Payday Loans Exposed: How 'Short-Term' Lenders Create Long-Term TroublesThe Center for Responsible Lending has released a new report about payday loans, and the picture it paints is seriously depressing. What's worse is that the report published Thursday actually understates the grim reality facing payday borrowers today.

For the uninitiated, a payday loan is a particularly expensive way to pay bills. In principle, the idea is simple: The company lends the borrower money for whatever their immediate need is, charges a fee, and then a few days later, on payday, the borrower pays the loan back in full.

If that were all that happened, it would be hard to see the harm. That's why the industry markets itself as a type of very short-term credit. The industry's trade group counsels: "[A] payday advance is inappropriate when used as a long-term credit solution for ongoing budget management." But the report found that only 15% of payday borrowers were one-time users.

In fact, the CRL documented that payday loans don't usually end on that first payday. The center tracked 11,000 borrowers for two years, and even including the one-time users, found that during those two years, the borrowers on average had a payday loan out for more than a year. Moreover, the report found that 90% of the time a new loan was taken, it was taken out during the same pay cycle the last one was repaid, essentially rolling over the debt.

Payday loans have to be paid back in full at the end of each payday cycle, which tends to leave the borrower short the next week, so she takes out a new payday loan, racking up a new fee. Those fees are steep: $15 to $20 per $100 borrowed, which if done two weeks in a row works out to about 400% interest annually. In fact, the loan terms are so abusive that payday loans are illegal in 17 states and Washington D.C. They can't be made to active-duty service members, either.

The punishing nature of the loans was made clear by other data in the report. While some borrowers stopped using payday loans in the first year, the people still using them in year two tended to take out bigger loans more often, showing that their debt problems were growing worse. And across both years, nearly half the borrowers failed to pay off the loan at least once, incurring substantially more fees and adding to their financial stress.

 'Money Really Does Grow on Trees' -- for the Lenders

Unfortunately, the data in the report almost certainly significantly understate the problems inherent to payday loans for two reasons.
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First, the data were collected between 2006 and 2008, before we hit the worst of the Great Recession. How many more families have turned to these loans since then? Second, the data come from Oklahoma, which has relatively strict rules on payday loans -- the key word being "relatively." Less-regulated states are likely to have worse borrower experiences.

According to the industry trade group, some 19 million Americans use these loans each year. Many more are surely tempted: A full 72% of Americans say they would have at least some difficulty paying bills if they missed a paycheck, according to a 2010 survey.

And boy, does the industry make the loans sound great. For example, a website I found Googling "payday loans" boasts:
"Regardless of your past, if you are currently employed and have a bank account, we can help you when it matters most. Have some bills due and you are not getting paid until next week?? Avoid the high cost of bounced checks from your bank and get a quick and easy Cash advance or a Same Day Payday Loan. ... At [the website], Money really does grow on trees!!"
The trade group does have a point, however, about the abusiveness of certain other types of credit:
$100 payday advance with a $15 fee = 391% APR

$100 bounced check with $56 insufficient funds and merchant fees = 1,449% APR

$100 credit card balance with a $37 late fee = 965% APR

$100 utility bill with $46 late and reconnecting fees = 1,203% APR
That's why consumers should seriously consider opting out of the "overdraft protection" plans provided by their banks. The fees involved -- even if they're $35 instead of $56 -- are ludicrous, and kick in for any transaction, no matter how small. Credit card fees are ridiculous too, but for better or worse, debtors don't have to pay off the whole principal each month, which allows them to manage the cash flow problems caused by late fees better than they could with with payday loans, at least for awhile.

If you want to preserve your financial health, don't use payday loans -- period. And do whatever you can to avoid falling victim to the abusive credit charges of other types of lenders, too.

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]]>borrowersborrowingCenter for Responsible Lendingcredit cardshigh interest rateslate feesoverdraft feespayday advancePayday Lendingpayday loansroll overAbigail FieldThu, 31 Mar 2011 15:30:00 ESTWhy Your Bank May Be Wrong About What You Owe on Your Mortgagehttp://www.dailyfinance.com/2011/03/28/mortgage-bank-wrong-about-what-you-owe/http://www.dailyfinance.com/2011/03/28/mortgage-bank-wrong-about-what-you-owe/http://www.dailyfinance.com/2011/03/28/mortgage-bank-wrong-about-what-you-owe/#commentsFiled under: , , , , , ,

Why Your Mortgage Bank May Be Wrong About What You Owe Attention homeowners with mortgages, whether you're current or in default: Double-check your mortgage bank's math. There's a significant chance that the bank is wrong about how much you owe them, particularly if you're behind on your payments.

The revelation that mortgage servicers have been incorrectly applying payments and otherwise messing up their records isn't new. Professor Kurt Eggert of Chapman University documented the problem as early as 2004, and in his recent testimony before Congress, he underscored that nothing had changed. What is new, however, is testimony in New Jersey that gives real insight into how the mistakes are happening.

Late last week, Adrian G. Lofton gave the New Jersey court that is investigating mortgage fraud in New Jersey a sworn statement that details how mortgage servicer records are altered by employees of Lender Processing Services. Although the LPS employees are given logins and passwords to access the banks' own records for the purpose of correcting and reconciling the files, Lofton, a former LPS employee, explained how they instead destroyed the integrity of the banks' business records.

How It Works -- and Why It Fails

When an LPS client has a mortgage that goes into default, Lofton explains, LPS starts managing the loan. In order to do that, the appropriate LPS employees are given login information for the bank's database. As a security measure, each login is unique. That login grants access to the bank's entire database of current and defaulted loans, so that the employee can address whatever problem exists. For example, if a payment that should have been applied to a defaulted mortgage was accidentally credited to a current mortgage, the LPS employee needs access to the current mortgage to fix the error.

When an employee can't fix or reconcile data in an account, she is supposed to enlist the help of her supervisor, and if needed, her supervisor's supervisor. Each manager also has unique login information, and each bank apparently has additional security protocols that LPS employees are supposed to follow. If the employees and supervisors were following the rules, all would be relatively well. But according to Lofton, they were not:
"...109. ...most of the [LPS] Associate Team members had gained unauthorized access to the logins and passwords of their team associates and supervisors for all of the bank servicers' computers.

110. With this unauthorized access to the Bank's computers, the [LPS] associates could go into the banks computer files and manipulate the data....

112. I was particularly concerned that during "crunch" times ...Team Associates were cutting corners....

116. When an employee cut corners, the employee left out one or more steps that should have been performed and had to make something up.

117. The problem caused by cutting corners might not come to light until six months down the road when an attorney asks questions about the billing record."
Although Lofton doesn't say it, it's clear that some of those problems caused by cutting corners might never come to light.

Lofton traces the cause of the blatant rule-breaking to LPS's already well-documented obsession with speed over accuracy, something that has undermined the integrity of the lawyering of foreclosures. LPS rewards employees with bonuses based on how fast they resolve issues and how rarely they need to involve supervisors to get things done. That pressure to hurry up drives the employees to "make something up" as Lofton puts it, to get their jobs done.

Lender Processing Services was contacted on Thursday for comment, but as of publication had not replied.

Who Is Adrian Lofton?

Lofton worked for LPS from 2006 through 2007, and prior to that had worked for its competitors, starting in 2001.
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Given his experience at other financial institutions, he was deeply disturbed by what he saw at LPS and raised his concerns up through the chain of command. Lofton says he was fired for his attempts at whistle-blowing.

Lofton sued for wrongful discharge, but didn't hire a lawyer, instead attempting to represent himself. Perhaps unsurprisingly, he lost his case. (To get a feel for what it's like for a pro se plaintiff to try to depose a witness represented by counsel, see this transcript of Lofton's.)

As to Lofton's agenda, well, his current filing doesn't further one other than trying to uncover the truth: Lofton made his filing in the New Jersey investigation of mortgage fraud in its courts. To the extent he can "win" anything, all he'll get is vindication.

The Cheapest Way to Mess Up Bank Records

LPS is the 800-pound gorilla of mortgage default servicing, doing over $1 billion of revenue in that business last year, according to its most recently filed annual report. And its clients include most of the big guns of the home loan business. In his time at LPS, Lofton reports seeing inappropriate account manipulations happening with the records of:
  • Bank of America (BAC)
  • Countrywide (now BofA)
  • Washington Mutual (now JPMorgan Chase) (JPM)
  • Option One Mortgage
  • Wachovia (now Barclays) (BCS)
  • Key Bank (KEY)
  • HomEq (bought by Wachovia, then Barclays),
  • EMC (now JPMorgan Chase)
  • Wells Fargo (WFC)
  • America's Servicing Company (Wells Fargo)
  • Saxon Mortgage
  • HSBC (HBC)
Even if some of those banks have dropped LPS since then, were their records ever comprehensively fixed?
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And what about other LPS clients? Surely they've picked up more, as the tidal wave of foreclosures really grew after Lofton left LPS. Indeed, that foreclosure surge surely worsened the problems, since the time pressure on LPS employees can only have gotten worse.

If you're tempted to feel sorry for LPS's bank clients, given that they might not even have realized that their contractor was messing up their business records, don't. Banks hire LPS -- and fail to effectively oversee it -- for one simple reason: They're trying to get something for nothing. LPS has risen to market dominance primarily because it doesn't charge the banks for its work. Instead, it charges the lawyers in its network who foreclose on the the banks' mortgages.

If the banks were willing to pay to have their business records handled with accuracy and integrity, they could have avoided these problems.

For consumers, the take-away message is simple: Your checking account isn't the only bank statement you need to balance to make sure the bank is tracking your money correctly. Start balancing your mortgage statements, too.




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]]>Adrian G. Loftonbank recordsbanksdebtdefaultforeclosure fraudForeclosuresKurt EggertLender Processing Services LPSlpsmortgage fraudMortgage messmortgage servicersmortgagestestimonyAbigail FieldMon, 28 Mar 2011 14:00:00 ESTWhat's Really Wrong With Letting Big Banks Pay Bigger Dividendshttp://www.dailyfinance.com/2011/03/23/whats-really-wrong-with-letting-big-banks-pay-bigger-dividends/http://www.dailyfinance.com/2011/03/23/whats-really-wrong-with-letting-big-banks-pay-bigger-dividends/http://www.dailyfinance.com/2011/03/23/whats-really-wrong-with-letting-big-banks-pay-bigger-dividends/#commentsFiled under: , , , , , ,

The Federal Reserve is finally -- albeit only implicitly -- admitting that not all the big banks are healthy: The Fed isn't letting Bank of America pay increased dividends.

When the Fed allowed other large banks to issue increased dividends last Friday, I asked why. The big banks are insolvent, because -- at a minimum -- their loan portfolios are wildly overvalued. The reason the banks aren't bankrupt despite their insolvency is because the government stands behind them. Since the banks are in such shaky financial straits, they shouldn't be paying out money they don't have as dividends. Period.

Yet the Fed let many of these the banks reward shareholders -- who, under reality-based accounting, would have been wiped out -- with money that could otherwise be used to help the banks become solvent. Investors aren't entitled to returns on their capital. Even Treasury bills theoretically involve some risk that investors won't get their money back.

The official rationale for the increased dividends is that they may allow the banks to attract new investors, which should allow the banks to make more loans. The logic of this escapes me. First, if the banks have sufficient capital to greatly increase their dividends and buy back shares, they have enough capital to make a meaningful amount of loans. I don't see why another step is required before the socially important increased lending might happen.

Either Banks Need Money, or They Don't

To those who might say that the current dearth of loans reflects a lack of demand, well, how about deploying that "excess" capital to make meaningful home loan modifications? Such modifications would also be economically useful, as keeping people in their homes instead of putting them through foreclosure could help the real estate market limp a bit more quickly toward recovery. There's no shortage of demand for meaningful loan modifications.

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And, if it were necessary to attract new investors to make loans, why didn't the Fed make the increased dividends conditional on increasing lending or meaningful modifications? The Fed has the leverage to do either, or even both. (Remember, the reason the Fed has control over the dividends in the first place is that such control was one price of the financial bailout that kept the banking system from failing.)

But the fact that really puts the lie to the idea that higher dividends are necessary to spur lending is the fact that share buybacks are being allowed. As the blog Baseline Scenario explains, buybacks are the equivalent of saying "we have more capital than we know what to do with." A bank can't simultaneously have more capital than it knows what to do with, and also need to attract more money before it can make loans.

Dividend Winners? The Executives, Of Course

Of course, the banks do know what they're doing with buybacks -- enriching their executives, who not coincidentally, make the decision to do the buybacks in the first place. Unlike dividends, share buybacks increase shareholder wealth by increasing the stock price, and thus are not directly taxed. For investors like executives, who have huge amounts of shares, that difference is meaningful. In addition, increased share prices can make executives' stock options more valuable, or earn them bonuses and other types of compensation.

Nonetheless, the executives would have to cash in while the increased share prices last: It's no mystery that future events could wipe out any gain from a buyback -- an impact that paying the cash out as dividends would avoid. And that risk again underscores how much worse allowing buybacks is than allowing dividends.

Drawing the line at Bank of America (BAC) is a positive step, but it's not enough. Bank of America's troubles, a large portion of which can be traced to its acquisition of Countrywide, are so well known that not even the most bullish, want-to-believe investor could swallow stress test results that gave it a clean bill of health. But Countrywide wasn't the only out-of-control lender. Consider what the FDIC says about Washington Mutual, which JPMorgan Chase (JPM) acquired.

So thanks, Fed, for forcing Bank of America to hang onto its capital so that it can perhaps cover its liabilities. But one reality-based decision does not a good policy make.



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]]>bank bailoutbank dividendsbanksBaseline ScenarioCountrywide FinancialcreditexecutivesFederal Reservefinancial cforeclosure crisishome loan modificationsinsolvencyinsolventinvestorsLendingliabilitiesliabilitymortgage messrobo-signing scandalShare buybacksStock buybacksAbigail FieldWed, 23 Mar 2011 14:30:00 ESTWhy Is the Fed Letting Banks Boost Dividends?http://www.dailyfinance.com/2011/03/21/why-is-the-fed-letting-banks-boost-dividends/http://www.dailyfinance.com/2011/03/21/why-is-the-fed-letting-banks-boost-dividends/http://www.dailyfinance.com/2011/03/21/why-is-the-fed-letting-banks-boost-dividends/#commentsFiled under: , , ,

Why Is the Fed Letting Banks Boost Dividends?The news hit Friday that the Federal Reserve is allowing big banks to pay sharply higher dividends. I don't understand how the Fed justified that decision. And not just because the results of the so-called "stress tests" are secret.

At least our four biggest banks are insolvent, Adam Levitin explains at the blog Credit Slips. The banks' balance sheets only come out in positive territory if home equity loans made during the bubble years are valued at much closer to their face value than good accounting or even common sense would dictate. First mortgages are apparently similarly overvalued. This isn't some fantasy of Levitin's, by the way: Paul Krugman and many other experts have described our banks -- big and small -- as "zombies" with fictional balance sheets.

And it's not as if those balance sheets are free from other stresses. One big near-term danger is banks' potential liability for the mortgage and foreclosure mess. Settling that tab with regulators and law enforcement agencies supposedly will cost the financial industry $20 billion to $30 billion -- though who knows if there will be a settlement at all. Those numbers are big enough that Republican lawmakers worry that a settlement would render big banks insolvent. (As if they weren't already.)

In the medium term, banks also face a serious risk from the growing mass of lawsuits over mortgage-backed securities: There are several scenarios under which those suits and the buybacks the banks may be forced into could threaten their balance sheets.

So why are the banks being allowed to give away cash to their shareholders that would be better applied to shoring up those shaky, fictional balance sheets? Yes, bigger dividends means the big executives, who are also big shareholders, get to pay themselves even more "compensation," but I'm not cynical enough to imagine that's what motivated the Fed to give the OK. So what gives?

It's one thing to lack the political will to "nationalize" the banks temporarily, wiping out shareholders, but cleaning up the banks' balance sheets for real. It's another thing entirely to let zombie banks pay big dividends. Regardless of what it would have the rest of us believe, surely the Fed knows better than to think these financial emperors are wearing clothes.

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]]>Adam Levitinbalance sheetbank dividendsbank stress testsbanksBernankecrisisFederal Reserveforced buybacksforeclosure fraudinsolventmortgage backed securitiesmortgage fraudPaul Krugmanrobo-signing scandalsettlementstock dividendzombie banksAbigail FieldMon, 21 Mar 2011 11:30:00 ESTWhy the Foreclosure Mess Settlement Proposal Can't Fix the Damagehttp://www.dailyfinance.com/2011/03/18/why-the-foreclosure-mess-settlement-proposal-cant-fix-the-damag/http://www.dailyfinance.com/2011/03/18/why-the-foreclosure-mess-settlement-proposal-cant-fix-the-damag/http://www.dailyfinance.com/2011/03/18/why-the-foreclosure-mess-settlement-proposal-cant-fix-the-damag/#commentsFiled under: , , ,

Why the Foreclosure Mess Settlement Proposal Can't Fix the DamageEver since this fall, when the mortgage industry's robo-signing scandal first broke, people have been aware that banks have been illegally foreclosing on homes.

Now there's a huge fight over what to do about that, mostly focused on a 27-page proposal that was supposed to represent the consensus of the 50 state attorneys general, but apparently doesn't. On top of that effort came a report of a "shock and awe" modification push from the federal government, but as Yves Smith at Naked Capitalism details, it's neither good policy nor practical.

One feature of both the attorneys general's proposal and the "shock and awe" maneuver is speed.

The attorneys general are in such a hurry to find a solution that they haven't even investigated the banks: They're just relying on consumer complaints to define the problem. Similarly, the shock-and-awe plan involves an impossible six month deadline. As Treasury Secretary Timothy Geitner explained to Congress: "All parties have a stake in bringing this to resolution as quickly as possible" and "It's very important that we try to bring this to bed as quickly as we can."

At least part of this desire for a fast fix is rooted in the belief that an agreement will help the housing market recover, which in turn will help straighten out the overall economy. That's true to some extent: If millions of mortgages were successfully modified and unnecessary and servicer-driven foreclosures were halted, as the settlement proposes, that would be good for the economy and the real estate market.

The Enormous Clouded Title Problem

But the settlement doesn't go nearly far enough to save the housing market. In fact, it can't go far enough, because it can't address one of the most confounding problems the banks have created: the millions of properties nationwide that now have "clouded" titles.

To put it plainly: Because of these bad titles, property owners can't prove they own the properties they think they bought, and banks can't prove the had the right to sell them.

Even though it's impossible to know how many properties are affected, I have confidence in saying millions nationally for the following reasons:

  • More than 1 million foreclosures have been completed since 2005; nearly 200,000 were completed in the third quarter of 2010 alone.
  • Foreclosures involving securitized mortgages seem to be flawed as a rule, not the exception.
  • Even when foreclosures may have been otherwise valid, the practices of foreclosure attorneys have clouded titles.
  • The problems are ongoing. More flawed foreclosures are completed every day.
  • The clouded title problem extends well beyond foreclosures. Both MERS, the electronic database that holds more than half the mortgages nationally, and possible securitization failures could have damaged the titles of the properties even though the borrowers are current on their mortgages.

The Solid Effects of Clouded Titles

You can't sell real estate when you can't establish that you own it -- banks won't loan money for purchasers to buy the property. That's because the bank wants to be sure that if it forecloses, it will get good title to the property. (Yes, this issue practically oozes irony.) That's why banks won't approve a mortgage for a property if a title insurance company won't insure its title. And title insurance companies won't do that if they know the title is clouded.

A few months ago, the Massachusetts Supreme Judicial Court issued its Ibanez decision, which made it clear that the banks' foreclosure practices -- and indeed, the standard securitization deal -- violated longstanding basic Massachusetts real estate law, and thus, many completed Massachusetts foreclosures were invalid. The foreclosing banks, which had either since sold the properties or still "owned" them, had no right to foreclose, and therefore had never owned those properties. So who owns them now? Well, the fact that it's a question is the very definition of "clouded title."

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Since it has been a couple of months since the Ibanez decision, I called a couple of large title insurance companies in the Boston area to see how title insurance for improperly foreclosed properties is being handled. To bypass talking points and smooth-talking spokespeople, I called insurance sales agents, representing myself as someone contemplating purchasing a Massachusetts foreclosure. Because I didn't say I was a member of the media, I'm not going to name the companies. But the conversations confirmed my thesis.

One agent called improperly foreclosed homes in Massachusetts "uninsurable." Another explained that the problem underscored in the Ibanez case has been around for years, and that any title company would need to look at foreclosures dating at least until the late 1970s, when securitization became more common, to make sure no improper foreclosure had happened in all those years. And some properties, she noted, had been foreclosed on multiple times.

That agent did note that the problem was worst for properties improperly foreclosed on in recent years that were still bank-owned. Those properties were truly uninsurable. That's because the bank couldn't make a claim on the title insurance policy it had purchased when making the original loan, since it was the entity that clouded the title. Indeed, honoring that policy would be like letting a arsonist collect on fire insurance. Thus much of the current bank-owned inventory in Massachusetts is largely uninsurable and thus unsellable.

No settlement with the servicers is going to solve that problem. And it's a national problem, not a Massachusetts one.

Where to Lay the Blame

When it comes to the clouded title problem, one group is wholly innocent: the borrowers -- "deadbeat" or not. The title issues are the equivalent of unforced errors in tennis: the banks have done this to themselves.

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And one party is generally guilty, in the sense that none of the problems could have developed this far if it had been doing its job, and that's the government.

By government I mean: regulators, particularly at the federal level; law enforcers at both the federal and state level; state legislatures and Congress to the extent they passed laws making the situation worse or failed to pass to pass laws that would have helped; and finally, Fannie Mae and Freddie Mac for their role in setting up MERS.

Even in that context, the largest share of the blame still must go to banks and their lawyers: But for them, the clouded title mess wouldn't exist. Here's how all of them created the crisis.

How Ownership Gets Confused

First, banks across the nation have used fraudulent documents to "prove" they have the right to foreclose. This is the classic robo-signing situation, and it, at least, would be solved if the attorneys general's settlement proposal was adopted.

While the issue is clearest in judicial foreclosure states -- where the documents are getting more scrutiny -- the problem exists everywhere. In nonjudicial foreclosure states, the problem frequently surfaces first in federal bankruptcy courts when banks ask for permission to foreclose on debtors in bankruptcy. The problem also shows up in those states' courts as homeowners try to fight the foreclosures.

For this title clouding problem, blame the mortgage servicers, who incidentally are also the big banks.

Second, as both the Ibanez and Kemp case from New Jersey illustrate, banks' standard securitization procedures may have failed to properly assign the promised mortgages to the securitization trusts, which means those securities aren't really mortgage-backed after all. It also means that the ownership of those mortgages (and in some states, title to the properties) remains with different banks that were part of the securitization processes -- banks that may or may not still exist today.

The clouded titles that result from busted securitizations are a particular problem in those states where the lender who holds the mortgage holds legal title to the property until the mortgage is paid off. In those states, all the borrower has is the right to use and enjoy the property until the mortgage is paid off and she gets legal title. Importantly, busted securitizations cloud the titles of current and defaulted mortgages in those states equally.

For this problem, blame the securitizers, who include the big banks, Wall Street, and their big law firm attorneys.

Forgeries and the Illegal Practice of Law

Third, foreclosure attorneys have processed their filings in illegal ways. For example, in Pennsylvania, the attorneys have done foreclosures with papers no lawyer reviewed, bearing signatures forged with the firms' named partners' permission. Those foreclosures, which were done via the illegal practice of law, appear to be void -- and there are many. Or consider that several Maryland firms have also had underlings forge lawyers' names on foreclosure documents, including on more than 1,000 deeds. Or consider the practices of the now defunct David Stern foreclosure mill in Florida.

Remembering that the Lender Processing Services business model emphasizes speed over substance and LPS deploys lawyers for something like half the mortgages in default, it's impossible that these problematic practices of foreclosure attorneys are limited to Pennsylvania, Maryland and Florida.

For this problem, blame both the foreclosing banks and their foreclosure lawyers. Blame the banks, because it was their relentless cost cutting that got us the current foreclosure business model. Blame the lawyers, because they knew what they were doing was illegal and let their greed get the better of them.

The Mess That Is MERS

Fourth, and perhaps most problematic, is the MERS debacle.

MERS mortgages have questionable validity. Whether or not the MERS model is legal seems now to depend on which judge is making the decision. Cases in different states, and even within the same state, are coming out differently. Where the MERS model is illegal, foreclosures done by MERS or by the people it assigns the mortgage to have clouded titles. Even where the MERS model is legal, the system's incredibly sloppy record keeping could leave multiple banks believing they have the right to foreclose on a given property.

For the MERS problem, blame the following, in no particular order: Fannie Mae and Freddy Mac, who were instrumental in creating it; Covington and Burling, the law firm that blessed it; Moody's, for blessing it as well; and the big banks who ran with the flawed system and made it what it is today.

Fixing the Problem

Because real estate law is state-based, fixing the clouded title problem will take legislation in all 50 states. But before legislators get busy drafting bills, a much more detailed investigation of the problem in each state needs to be done. How many properties are involved? How many different types of title problems? How many different players helped cause the problem, and how can they be made to pay for fixing it? What should be done about the innocent buyers of illegally foreclosed property? What should be done about the borrowers who were evicted by the wrong bank?

It's a horrible mess. And it's one that the rush to cut a deal with the banks is blowing right past.

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]]>AttorneysGeneralclouded titlefannie maeforeclosure crisisforeclosure fraudforeclosure millForeclosuresforged signaturesfreddie macIbanez decisionlegal titleLender Processing Servicesmersmortgage backed securitiesmortgage servicersmortgagesrobo-signersrobo-signing scandalsecuritizationsettlementtimothy geithnertitle insuranceAbigail FieldFri, 18 Mar 2011 18:00:00 ESTBank of America Document Leaks Allege Insurance Scamshttp://www.dailyfinance.com/2011/03/14/the-first-bank-of-america-document-leak-force-placed-insurance/http://www.dailyfinance.com/2011/03/14/the-first-bank-of-america-document-leak-force-placed-insurance/http://www.dailyfinance.com/2011/03/14/the-first-bank-of-america-document-leak-force-placed-insurance/#commentsFiled under: ,

At one minute past midnight on Monday morning, a hacker collective released a set of emails on the website BankofAmericaSuck.

While all the allegations in the leaked documents involve Bank of America (BAC) -- through a soon to be ex-subsidiary called Balboa Insurance -- they also implicate many other big banks that are clients of Balboa, including: "GMAC, Aurora Loan Services [a subsidiary of Lehman Bros Holdings], IndyMac Federal Bank [a subsidiary of OneWest Bank], Saxon, HSBC, PennyMac [a collection agency started by former Countrywide Home Loans executive Stan Kurland after CHL and Balboa were sold to BAC], Downey Savings and Loans, Financial Freedom, Select Portfolio Services, Wells Fargo/Wachovia and [BofA]."

Note: Unless otherwise linked and stated without caveat, all the information in this article comes from the documents posted at the site.

Who Is the Anonymous Leaker?

The leaker claims to be a former seven-year employee of Balboa Insurance -- first, when it was part of Countrywide and then under Bank of America when it took over Countrywide -- who alleges that he was persecuted by BofA, labeled a terrorist, and had his career destroyed. Much of the information on the site is a Q&A with the leaker, although one email chain is included.

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Perhaps realizing credibility could be an issue, the Q&A focuses on the leaker's self-reported motivation and employment experience. The leaker essentially says he has nothing left to lose -- BofA has already taken it all away -- plus he wants to set the record straight.

As to the leaker's credibility, Naked Capitalism's Yves Smith notes that he makes a number of typos and also uses some terms incorrectly, saying "lienholder" when "servicer" is clearly meant. Nonetheless, Smith finds the allegations credible. So do I.

Importantly, the information is not from the same database that Wikileaks reportedly has, as the leaker offers to decode that information if it's made available to him.

As the documents are labeled "Ex Bank of America Employee Can Prove Mortgage Fraud 1," but the information thus-far revealed doesn't really involve mortgage fraud, perhaps a "Part 2" will include such documents, translated Wikileaks or otherwise.

Force-Placed Insurance Scams

The leaker's information relates primarily to "force-placed insurance" -- insurance taken out by a mortgage servicer on a home when the homeowner doesn't maintain the level of insurance required by the loan -- and the role of Balboa Insurance in that industry.

Force-placed insurance is such a problem that the proposed bank settlement on improper foreclosure and loan-servicing practices currently in the work contains many "shall nots" regarding it, including such things as: Thou shalt not buy force-placed insurance, charging a borrower and taking borrower's money from escrow to pay for it, when borrower already has an insurance policy in place.

Felix Salmon details the kind of scams involved, discussing reporting by Jeff Horowitz at American Banker, including these examples:
"A homeowner had a $4,000 insurance policy, which was paid by the loan servicer, Everbank, from an escrow account. But Everbank allegedly let that insurance policy lapse, allowing it to replace the policy with a different policy, this one costing more than $33,000. The insurer, a subsidiary of Assurant [the market leader ahead of Balboa], then paid Everbank a $7,100 kickback for giving it such a lucrative policy. And, writes Horwitz, 'left the door open to further compensation' down the road."
and
"Horwitz has found one case where an $80,000 property was being insured for $10,000 a year, and also notes that at Assurant, 'the unit handling force-placed insurance has accounted for $811 million of its $879 million in profits during the last two years.'"
So force-placed insurance involves grossly inflated premiums, something the leaker also reported. And the servicer can simply decide not to use a borrower's money that is specifically set aside in escrow to pay the insurance premium for the existing insurance.

Why the Scam Works

When the borrower experiences force-placed insurance, it is his servicer that is the one buying the insurance. The leaker's first big revelation -- at least to industry outsiders -- is that only a handful of companies do this for many servicers. So if the insurance tracking and purchasing is done by an insurance company like Balboa, why do borrowers think their lenders are doing it? The employees of Balboa Insurance falsely present themselves as employees of the servicer when dealing with borrowers:
"When you call in to customer service, for say, GMAC, you're not actually speaking to a GMAC employee. You're actually speaking to a Bank of America associate working for Balboa Insurance who is required by their business to business contract with GMAC to state that they are, in fact, an employee of GMAC. The reasoning is that if you do not realize you're speaking to a Bank of America/Balboa Insurance employee, you have no reason to question the validity of the information you are receiving from them [about the price of the force-placed policy]. If you call your insurance agent and ask them for the lienholder information for your GMAC/Wells Fargo/etc lien (home or auto) you will be provided with their name, but the mailing address will be a PO Box at one of Balboa's 3 main tracking locations (Moon Township/Coreaopolis, PA, Dallas/Ft Worth, TX, or Phoenix/Chandler, AZ)."
Horowitz seemed to find the same situation. He noted that when a borrower's attorney tried to investigate a force-placed policy, he discovered that:
"While the people [responding to requests about the force-placed insurance] there claimed to represent the servicer, they were operating out of an office belonging to a force-placed policy insurer since acquired by QBE Insurance Group.

[The attorney] didn't understand why the insurer would be speaking on behalf of the servicer. But shortly after he began asking questions about the relationship between servicer and insurer, the case settled. Confidentially. At the insurer's request. . . ."
A Different Kind of Assembly Line

One of the hallmarks of the foreclosure scandals is how much of the problem was caused by outsourcing relatively high-level functions to companies that minimize costs by industrializing processes that really aren't amenable to that treatment. One small example is preparing court filings like affidavits of indebtedness or assignments of mortgage.

By using an assembly-line system of blank-fillers, signers, notarizers, and witnessers, document creation became very efficient, but also flawed -- both legally and substantively. The industrialization of the paperwork was driven by incentives and disguised by having the single-task completers act in the name of the various servicers, rather than their true employers.

According to the leaker, force-placed insurance works precisely the same way. The processes within Balboa have been industrialized such that people are only doing one step of a multi-step process, over and over, and never see the full picture. Processing speed is a focus and is financially rewarded. The bonuses require people to process 200 to 2,000 loans per day, depending on the job function.

And even though having Balboa do the work for the various servicers is in itself a type of outsourcing, Balboa reduces costs further by outsourcing work to SPi in the Philippines and MphasiS in India, according to the leaker. (Homeowners I've spoken with have gotten calls in the name of their servicers from such countries, so the leaker's explanation of this is very plausible to me.)

The one email chain that is included in the leak reflects the dynamics that result in such a set up. The chain describes employees of BofA/Balboa trying to hide the fact that they sent out erroneous letters relating to some 80 GMAC loans by delinking the letters from the loan files. Even though concern was expressed in the email chain that such delinking would be problematic from an audit perspective, it was authorized.

Fixing the Wrong Mistakes

Another dynamic that results from the cost-cutting focus of the system, according to the leaker, is this: A lot of effort is spent fighting over trivial errors by the foreign data entry companies because proving such errors results in big savings to Balboa. The leaker was not, however, authorized to spend money to fix more substantial problems:
"If I bring up a system glitch that's affecting 10,000 loans held by real human beings in the real world, in the system, that's a $25,000 project to fix that only truly affects .001% of the loans on paper (discussing numbers like that in a dozen meetings only to have the initiative turned down is the real waste). If I can drop one of our offshore vendors' quality below a certain level, however, than I've just saved the company $250,000."

Another Allegation

An unrelated and unsubstantiated allegation that is leveled almost incidentally must also be mentioned. The leaker claims that Balboa/Countrywide:
"knowingly hid foreclosure information from federal auditors during the takeovers of IndyMac Federal (a subsidiary of OneWest) and Aurora Loan Services (a subsidiary of Lehman Bros Holdings), falsifying loan documentation in order to proceed with foreclosures by fixing letter cycles in the system, reporting incorrect volumes to all of their lenders and to the federal auditors to avoid fines for falling behind on Loan Modifications, purposely and knowingly adjusting premiums for REO (Real Estate Owned) insurance for their corporate clients while denying forbearance for individual borrowers, etc, etc, etc."
The leaker makes this claim without supplying an email to back it up. It's perhaps worth noting, however, that fabricating letters to facilitate a foreclosure is a type of document fraud that has shown up in a Countrywide-turned-BofA foreclosure case in Pennsylvania, so the allegation sounds plausible to me.

It would certainly be provable/disprovable by subpoenaing documents. But I have little hope of that happening. Gretchen Morgenson reports in the New York Times that the attorneys general did not investigate the servicers before they created their proposed settlement of the mortgage mess, relying instead on the many, many complaints their offices received from borrowers.

Talk to the Waitresses and Bartenders

A rich set of future sources, according to leaker, are the drunken BofA employees and the waitresses and bartenders who serve them at the happy hour spots near BofA processing centers. Leaker claims they all have many stories to tell. I'm not sure where the nearest one of those to me is, but I'll look into it. As should you.


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]]>Bank of America WikiLeaksforce-placed insuranceHomeownersInsuranceinsuranceinsurance scamsleakswhistleblowerWikileaksAbigail FieldMon, 14 Mar 2011 12:30:00 ESTBofA Offers to Help Fix Mortgages...If You're a State Legislatorhttp://www.dailyfinance.com/2011/03/11/bofa-offers-to-help-fix-mortgages-if-youre-a-state-legislator/http://www.dailyfinance.com/2011/03/11/bofa-offers-to-help-fix-mortgages-if-youre-a-state-legislator/http://www.dailyfinance.com/2011/03/11/bofa-offers-to-help-fix-mortgages-if-youre-a-state-legislator/#commentsFiled under: , , ,

While nonjudicial foreclosure laws are not known for their excessive generosity, Hawaii's is particularly draconian. In the Aloha State, it's possible for homeowners to have their houses foreclosed on and sold for much less than their full value worth, without ever realizing the foreclosure is underway.

The law dates to 1874 and its abusiveness is rooted in effort to take land from native Hawaiians. Legislators have repeatedly tried to get the law changed, but they never seem to succeed.

Banks Versus Legislation

One reason for this legislative inaction might be the effectiveness of the bank lobby. According to Netra Halperin, who works for a Hawaii legislator, and herself ran unsuccessfully for office last year, two representatives of Bank of America (BAC) recently met with her. In her account of the meeting, which I've excerpted below, BoA's workers offered a state legislator special access to its mortgage department. I'm omitting the legislator's name because only Ms. Halperin was present at the conversation and she is speaking for herself, not for the legislator.

The quotes are to the best of Halperin's recollection, and represent only the relevant part of a longer conversation:
On about 5:30 p.m., Wednesday, March, Marvin Dang, Attorney for Hawaii Financial Services Association and David Swartley, Senior V.P., Regional Manager, Pacific Northwest, State and Local Government Relations, Bank of America, walked into our office in the capitol.

Swartley: "Bank of America is offering a special hot line to the Bank President for legislators, their staff, their families and constituents who need help with their Bank of America mortgages. It is the same number that we give to congresspeople and their families and aides. The line goes directly to the president's office, though they wouldn't be speaking directly with the president."

Halperin: "I also work for an attorney, James Fosbinder, who defends homeowners from mortgage foreclosure. Can I also give our clients this hot line number?

Swartley: "No, it is only for legislators and their staff, and family -- and constituents."

Halperin "Is that ethical?"

Swartley: "I think it's transparent. It is what it is."

Dang: "Let me explain it to you this way: I used to be a legislator. Constituents would call me about things like potholes. Even though it wasn't my responsibility I would send them to someone who could help them. People only call legislators if their problem is very serious. Our goal is to help legislators, to take the heat from constituents off of them."
Halperin later told me that Swartley claimed that he was visiting Hawaii because of a proposed law, which she assumed was HB894, a bill that would place a five-month moratorium on non-judicial foreclosures. She gave me a copy of the letter that BofA gave her with its special phone number, a copy of the letter announcing the lobbying visit, and later told me that Representative Robert Herkes, Chair of Commerce and Consumer Protection Committee, told the House that BoA spoke to all 76 of Hawaii's state legislators.

BoA's Explanation

To get a better understanding of the situation, I contacted BoA and discussed the letter with spokeswoman Jumana Bauwens, who acknowledged that Swartley had, indeed, visited Hawaii. Noting the bank's "outreach efforts," she also sent a pair of press releases outlining BoA's attempts to work with borrowers.

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According to Bauwens, Swartley's visit was intended to "enhance the communication channels with the legislators and other public officials," provide an "update on Bank of America's focus on distressed borrowers and outreach initiatives" and generate "feedback on the geographical areas that we need to focus on during our outreach efforts in April." She also said the phone number "is not unique to Hawaii, it is simply a line designed to help public officials better handle constituent complaints that come their way."
In short, Bank of America confirmed Halperin's story: It is empowering legislators with the seemingly godlike power to get BofA to fix a homeowner's mortgage modification. But in order to preserve the godlike nature of that power, no one else can have access to the number, not even people who most need it -- like lawyers representing people struggling to get modification problems with the bank solved. It's worth noting BoA's press releases didn't say anything about the special hot line number.

Fixing Problems or Currying Favor?

If BofA was really concerned about modifying mortgages, it wouldn't give legislators a special hot line to the president's office. To make it easier for people to modify mortgages, BofA could overhaul its current process. One model would be a process in the settlement the state attorneys general and others recently offered the banks to resolve their illegal and abusive mortgage and foreclosure practices. The proposal would require servicers to set up an easy way for borrowers to submit their documentation electronically, short-circuiting the seemingly endless resubmit documents loop, and mandate responsive time frames to get the borrowers consistent, reliable answers quickly.

Indeed, the initiatives in the settlement proposal far surpass the PR-heavy, questionable outreach efforts in the press release Bauwens sent. Consider the experience of Martin Galvan at a JPMorgan Chase outreach effort at the Los Angeles airport. According to Galvan, the Chase counselor told him that, with all the modification programs, "We don't know what we're doing right now." Obviously, this isn't quite as useful as a hot line to the president's office.

Not For The Public

Indeed, the letter that BofA sent to the legislators was very explicit that the line of communication had to come through the legislators' offices, not directly from the homeowners, emphasizing that "In order to maintain our service commitment to you, it is critically important that the e-mail and phone contacts that are being provided to your staff not be provided to the general public." [bold and italics in the original.]

In her explanation of the Hawaii visit, Bauwens noted that BofA also has phone lines dedicated to "housing counselors, private attorneys and community groups." But if the lines were a priority, one might have expected Swartley to say something like: "Ms. Halperin, while you can't give this number to the foreclosure defense attorney you work for, here's the dedicated line for them." Or even, "While you can't give this number to the attorney, we do have a special line for them, and I'll have some one call you back with it." Similarly, if numbers for housing counselors were so well established and distributed, it's worth asking why the proposed mortgage mess settlement had to explicitly say: "Servicer shall not discourage borrowers from working or communicating with legitimate non-profit housing counseling services."

Perhaps housing counselors, private attorneys and community groups that have received the hot line phone numbers Bauwens mentions could tell me of their experience using them. Did you get a one-business day response, a high-level review of the issues, and an expedited response? And if you're a housing counselor, private attorney or community group working with BofA borrowers on modifications and foreclosures, and you didn't get such a number, let me know that too. Be sure to let me know how to connect with you to confirm your story. If I get sufficient responses, I'll do a follow-up story reporting them.

The Difference Between Help and Lobbying

Why is this phone number such a big deal? Because at its core, this hotline and email address is about defeating borrower-friendly legislation. It's lobbying, not customer service.

By limiting access to the number, BofA is, effectively, offering to help Hawaii's legislators get re-elected, whether because they publicly offer to help constituents or because they use the special access in a targeted way, perhaps to reward campaign contributors or particularly persistent, media-savvy constituents. It's worth noting a legislator's offer to use the unpublished number to help any constituent who calls doesn't change the problematic nature of this lobbying effort. Homeowners shouldn't need their legislators to intervene in order to get their banks to play ball.

By giving this power to legislators, BofA seems to be trying to buy their gratitude. (The link is to research on the impact of small pharmaceutical company gifts to doctors on doctors' decision-making and behavior.) While it will never be known if the hot line affects a legislator's vote on important legislation, it's clear that such influence is the motivation behind the massive resources that have been dedicated to setting this number and service up for every legislator and member of Congress in the country. Or, in BofA's more delicate wording, this hot line may help to "enhance the communication channels with the legislators and other public officials."

BofA's letter to legislators concludes: "Your constituents, our customers, deserve a direct response to their concerns regarding their mortgage needs. This communication is just another effort on our part to ensure that we service their needs in an appropriate and timely fashion."

I couldn't agree more. With that in mind, here's the special hot line number and e-mail address that the company reserved for legislators (and specifically requested I not publish): 888-655-7622, poinquiry@bankofamerica.com.


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]]>foreclosurehawaiihawaii real estatehot linemortgagesAbigail FieldFri, 11 Mar 2011 20:45:00 ESTDecoding the GOP Argument Against Punishing Banks for Their Mortgage Crimeshttp://www.dailyfinance.com/2011/03/11/decoding-the-gop-argument-against-punishing-banks-for-their-mort/http://www.dailyfinance.com/2011/03/11/decoding-the-gop-argument-against-punishing-banks-for-their-mort/http://www.dailyfinance.com/2011/03/11/decoding-the-gop-argument-against-punishing-banks-for-their-mort/#commentsFiled under: , , , , , , ,

Now that the mortgage mess settlement proposal has been made public, with its very basic demands that mortgage servicers follow the law and competently service mortgages, the push-back has begun. Cheynne Hopkins and Rob Blackwell of American Banker report on the first major effort by the banks' allies to weaken the proposal.

I use "the banks" and "mortgage servicers" interchangeably because according to a list of the ten biggest mortgage servicers compiled by Reuters last fall, the top five are: 1. Bank of America (BAC), 2. Wells Fargo (WFC), 3. JPMorgan Chase & Co (JPM), 4. Citigroup (C) and 5. GMAC/Ally Financial. Not coincidentally, those banks were Nos. 5 through 9 on the list of recipients of federal bailout money, according to Pro Publica, for a total of $160 billion of your tax dollars. It's irrelevant that all but the $16 billion given to GMAC/Ally has been paid back. What matters is that when the big banks needed help, the taxpayers had their back.

So who are the banks' allies? In the Senate, their leader is Richard Shelby (R-Ala.), who also lead the opposition to the creation of the Consumer Financial Protection Bureau. In the House of Representatives, the banks' allies are the Republican leadership, including Financial Services Committee Chairman Spencer "Washington and the regulators are there to serve the banks" Bachus (R-Ala.), and Rep. Scott Garrett (R-N.J.).

Among Rep. Garrett's largest campaign contributors recently and throughout his career have been Bank of America and the debt collector trade association ACA International. Incidentally, Garrett has taken large campaign contributions from a hedge fund -- and now chairs the subcommittee overseeing hedge funds. Both Bachus and Garrett were also fierce opponents of the Consumer Financial Protection Bureau.

Campaign cash aside, why do these people oppose forcing mortgage servicers to do things like "ensure accuracy and timely updating of borrower's account information, including posting of payments and imposition of fees" and making sure that those fees are "bona fide, reasonable in amount, and disclosed in detail to the borrower"?

I mean, can you imagine if your bank handled your checking account this way, failing to credit your deposits and charging you outrageous fees without telling you about them? You'd change banks in a heartbeat. But therein lies the rub: Borrowers aren't the mortgage servicers' customers, and borrowers have no way to change servicers.

Decoding Senator Shelby

Let's start with Senator Shelby. Here's what he has said, according to American Banker article linked above. Missing words (...) are not Shelby's, but are rather things like "he said." I follow each quote with a sincere effort at translation:

Quote 1. The term sheet is a "regulatory shakedown" to "advance the administration's political agenda."

Translation: The Obama administration wants to coerce banks, under threat of prosecution, to obey the law and deal fairly with borrowers in good faith. I think that's bad policy. It's akin to blackmail and is purely political.

That must be what he means since the settlement explicitly tells the banks to obey the law either explicitly or implicitly at least 11 times.

As to good faith and fair dealing, the lack of both was so extreme that beyond making many specific demands for fair dealing -- e.g., no foreclosing while a modification application is pending or a trial modification is under way, no telling people to default if they want the bank's help, no telling credit reporting agencies wrong information, and so much more -- the proposal includes a blanket requirement:

"Servicer shall have a general duty of good faith and fair dealing in its communications, transactions, and course of dealing with each borrower in connection with the servicing of the borrower's mortgage loan."

Indeed, the lack of good faith on the banks' part has extended beyond borrowers to communities. That's why the proposal also would impose a duty to: "ensure that vacant, abandoned, [bank owned], and charged-off properties do not become blighted." The proposal also tells banks they can no longer abandon properties by failing to complete foreclosures, dumping them on struggling municipalities.

Quote 2. Sen. Shelby also said: "Under the guise of helping homeowners hurt by improper foreclosures, regulators are attempting to extract a staggering payment of nearly $30 billion for unspecified conduct ... Setting aside for a moment the attempt to end-run Congress, I question whether removing $30 billion in capital through a backdoor bank tax is the best way to jump-start lending. The long-term consequences of this settlement could be even more serious. It would politicize our financial system."

Translation: Well, it speaks for itself. I'll note though that the settlement isn't just about improper foreclosures. Framing it that way is simply a political tactic to make it seem like the remedies are disproportionate to the problem. In fact, the settlement proposal targets a huge range of illegal and abusive practices that have been well-documented for years, practices that the servicing industry knew weren't kosher at least since the 2003 Fairbanks settlement. As to the $30 billion, well I hope Sen. Shelby's right about that -- it's more than I've otherwise heard floated.

And what might Sen. Shelby mean by "politiciz[ing] the financial system?" That such a settlement would trigger even more campaign contributions and lobbying by the banks? The settlement surely would, as the only way to overturn it would be through legislation or regulation. But how is that different from any effort by government to put the interests of consumers before the interests of the big banks?

Quote 3. Regarding the Consumer Financial Protection Bureau, Shelby said: "Just last year, I warned that the new bureau of consumer financial protection would prove to be an unaccountable and unbridled bureaucracy. I did not expect to be proven correct so quickly ...The process by which it is being imposed is potentially far more concerning ...The proposed settlement would fundamentally alter the regulation of our banks. Yet this would be done without congressional involvement. Instead, it would be done by executive fiat through intimidation and threats of regulatory sanctions."

Translation: Shelby seems to be railing against the idea of a corporate compliance agreement being used by law enforcement agencies to resolve corporate law breaking. Odd, since that's how prosecutors typically deal with law-breaking corporations.

He couches his defense of the banks as a concern over the usurpation of congressional power, but the proposal is no such thing. Congress explicitly gave the Consumer Financial Protection Bureau jurisdiction over mortgages. This settlement is about mortgage servicing, and its compliance provisions are overseen by the bureau and the states' attorneys general. It doesn't "fundamentally alter the regulation of our banks" in any sense.

Quote 4. "The administration and our financial regulators are clearly hoping the banks will consent to these new regulations ...The precedent these strong-arm tactics could set, however, should be of concern to all citizens. If these tactics can be used successfully on financial institutions, they can be used on any business."

Translation: I realize that the big banks aren't sympathetic victims, so imagine Big Government coming after you, forcing you to accept rules you don't like. Oh, please ignore the fact that before you face any risk of that, you'd have to break the law so thoroughly that you got all 50 state attorneys general, the Department of Justice, and your regulators angry enough to take action against you.

A more honest warning would have been: "Hey, any company out there that is routinely breaking the law, take heed: The government might actually come after you and try to force you to change your ways."

Decoding the Banks' House Allies

Reps. Bachus and Garrett, among quite a few others, have sent a letter to Treasury Secretary Timothy Geithner complaining about the deal and asking a series of questions. American Banker posted the letter. Below are some of the questions. I've provided my own versions of the answers Secretary Geithner might consider giving the representatives.

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Q: What specific legal authority grants federal and state regulators and agencies the power to require mortgage principal reductions when the House and Senate have voted down such proposals?

A: An agreement is just that. If the servicers don't want to do principal reductions, they can choose to face prosecution. Law enforcement doesn't need Congress to pre-authorize contract negotiations, particularly not plea-bargains.

Similarly, state attorneys general don't need Congress's permission to choose the remedies they seek for the violation of their states' laws, absent Congress's preempting state action. And when Congress decided not to require mortgage principal reductions, it didn't preempt anything.

Q: What specific legal authority grants federal and state regulators and agencies the power to effectively legislate new rules and standards for the mortgage servicing industry?

A: See first answer. This deal would be an agreement between banks and regulators, not legislation. The reason its effects seem to resemble legislation is the scale of the lawbreaking. Nobody called it legislating when the Federal Trade Commission made a similar deal with a single lousy servicer in 2003. The substance and the process are the same this time -- the only difference is scale. And it was the banks, not the law enforcers, who determined the scale through their lawless actions.

Q: What role did persons associated with the [Consumer Financial Protection Bureau] have in drafting the proposals in the term sheet? What specific legal authority permits an official associated with an agency that does not have regulatory or enforcement authority to participate in settlement negotiations?

A: This is silly. The Consumer Financial Protection Bureau has been given jurisdiction over mortgages, and will naturally enforce any agreement reached. The agreement is necessary because of the way the servicers have mistreated consumers, after all. The fact that the agency doesn't go "live" until July doesn't change the fact that the substance of the settlement will fall squarely with in the Bureau's jurisdiction. Surely it makes sense for the agency that will enforce an agreement to participate in shaping it? In making some of these same arguments, Adam Levitin at Credit Slips notes a lot of this stuff is a "witch hunt" against Elizabeth Warren, the woman charged with setting up the agency.

Another question -- which I won't include in its entirety -- makes the same political framing move that Sen. Shelby did, and defines the settlement purely in terms of foreclosure violations. It then notes that mortgage principal reductions aren't foreclosure related, and asks: "What is the legal basis for using funds collected in an enforcement action to benefit parties who have not been harmed by the purported wrong doing?"

A: First, the wrongdoing extends far beyond foreclosures to servicing more generally. Second, the banks' risk-shifting securitization machine fed the housing bubble to otherwise-unreachable heights, which resulted in the sharp decline in housing prices that has left so many homeowners underwater -- a harm that is a direct consequence of the banks' actions. Third, funds collected under enforcement actions are used to help people not directly harmed by the wrongdoing so often, there's a legal term to refer to it: cy pres.

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Q: Have the officials who drafted this term sheet considered how its terms could affect the safety and soundness of the financial institutions bound by it?

A: Good question. It's true that a settlement that left banks requiring another bailout would be counterproductive. But how can that not have been considered? Similarly, federal regulators right now are deciding whether or not to let banks pay higher dividends to their shareholders, which the banks insist they are stable enough to do. Surely the regulators will take the proposed settlement into account in making that dividend decision.

Q: Will forcing servicers to fund principal reductions for underwater loans they service affect the incentive of mortgagors to stay current on their loans?

A: YES! And in fact, that's an argument in favor of principal reductions. After income loss, one of the biggest predictors of defaulting is being substantially underwater. Reducing people's principal will make it more likely they will stay current on their loans. Negative equity leads to more defaults in other ways too, as the Center for Responsible Lending's recent congressional testimony shows. Homeowners with negative equity can't sell to escape a mortgage they can no longer afford. (As the many homeowners who have tried to get banks' permission for short sales have discovered, foreclosure typically results instead.)

The next question asks if fixing the foreclosure process will delay the housing market's recovery and further erode investor confidence, and if fixing foreclosures would deter private investment in the housing market.

A: Delay recovery? Yes and no. Yes, because foreclosures will be even slower to process, and until the foreclosure glut is processed, housing can't really recover. No, because fixing foreclosures will stem the clouded title problem, which is already a major obstacle to a housing recovery. After all, how many banks are going to make loans so people can purchase properties the title insurers won't insure? Fixing foreclosures now will at least cap the problem at damage already done.

As to fixing investor confidence, I presume the letter means investors in mortgage-backed securities. Those investors are often better served by modifications than foreclosures, so forcing the servicers to modify should increase their confidence, not reduce it. As to deterring private investment in the housing market, the clouded title issue will do that more than anything else. So again, foreclosures need to be fixed.

The last question notes that 11 million mortgages are underwater, and says they can't all be written down. How, it asks, will banks choose?

A: The term sheet sets some parameters, but gives the banks lots of discretion. Do these members of Congress want that discretion taken away?

To sum it all up: Any time anyone objects to this settlement proposal, hand them a copy and ask them to highlight which provisions bother them most. Then have a real conversation. But don't just take politicians at face value when they try to tell you what the settlement is, particularly not those members of Congress who see themselves as there to "serve" the banks.


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]]>Attorney generalclouded titleConsumer Financial Protection BureauElizabeth Warrenforeclosure crisisforeclosure fraudForeclosuresGOPlawsuitmortgage fraudMortgage messmortgage modificationmortgage servicersmortgagesproposalRegulatorsrepublicansRichard ShelbyScott GarrettsettlementSpencer Bachusunder water mortgageswrite-downsAbigail FieldFri, 11 Mar 2011 12:00:00 ESTForeclosure Fraud in Maryland: Banks' Lawyers Accused of Forging 1,000+ Deedshttp://www.dailyfinance.com/2011/03/09/foreclosure-fraud-maryland-banks-lawyers-forged-deeds-signatures/http://www.dailyfinance.com/2011/03/09/foreclosure-fraud-maryland-banks-lawyers-forged-deeds-signatures/http://www.dailyfinance.com/2011/03/09/foreclosure-fraud-maryland-banks-lawyers-forged-deeds-signatures/#commentsFiled under: ,

False Deeds in Maryland: More Foreclosure Fraud Damage Emerges As if the country needed more proof of the outlaw behaviors of banks and their agents, The Baltimore Sun's Jamie Smith Hopkins reports that 1,000 or more Maryland deeds are likely forgeries, created by a foreclosure mill. A former notary from law firm Shapiro & Burson filed an affidavit with law enforcement and regulators charging that the attorneys' signatures on the deeds and other important documents were forgeries signed at the express direction of management. The affidavit attached sample signatures.

If the forgery claims are true -- and that's not much of an "if" -- the false deeds cloud the properties' titles, creating a nightmare for the innocent people who bought the homes after they were foreclosed upon.

This isn't the first time this has come up in Maryland: Last year, two other law firms in the state, Bierman Geesing & Ward and Covahey Boozer Devan and Dore, admitted that they had forged signatures on foreclosure documents in a similar manner. And Baltimore firm Friedman & MacFayden is being investigated for similar allegations, the Sun reports. At this rate, the title issues in Maryland could prove to be as tragic in scope as those in Florida.

A Nationwide Fraud Problem

But it's not just a Maryland issue. Evidence of the same illegal practices has surfaced in Pennsylvania. Given the speed-over-substance approach applied nationally to foreclosures, and the volume of foreclosures processed by foreclosure mills, surely the problem extends across the country, and the fraud will likely be found to have been going on for at least the last few years. So we're bound to see a storm front of clouded titles develop and spread across the land, above and beyond the title issues caused by MERS.

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Both problems are a direct consequence of cost-cutting efforts at big, supposedly massively profitable banks. That's both tragic and ironic, given that America's previously-rock solid private property rights system underpinned our prosperity -- the prosperity that allowed the big banks to grow in the first place.

Confusingly, the government is reportedly nearly ready to allow the big banks to pay big dividends again. This is a terrible idea. Before a dime goes to shareholders, the state and U.S. attorneys general, federal regulators, and others working to settle the mortgage mess need to cordon off enough cash to pay for all the damage the banks' cut-rate policies and illegal practices have created. The government didn't hesitate to raise a similar concern about BP's assets in the wake of the Gulf of Mexico oil spill. But we know from the State of the Union speech that Big Oil isn't particularly popular in Washington, D.C., at the moment. Is Big Finance really so beloved that the government will let these companies distribute assets that surely will be needed to repair the damage their actions caused?

To put it another way: How can "stress tests" show the banks are sound enough to pay dividends when the costs of hiring the employees necessary to carry out even the most minimal settlement the government and regulators could accept would be massive, the potential bill from mortgage mess litigation continues to grow, and any penalty associated with a settlement has the potential to be "material" according to the banks themselves? Whether or not the banks are allowed to start paying dividends is going to be a big tell about how forcefully the government plans to bring the banks to heel. Another big tell will be whether criminal indictment come soon: The blog FireDogLake shows how easy such indictments would be to bring.

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]]>Attorney generalbank dividendsBierman Geesing Wardclouded titleCovahey Boozer Devan and Doredeedsfloridaflorida real estateforeclosure crisisforeclosure fraudforeclosure milllsForeclosuresforged deedsforged signaturesforgerymarylandMERSmortgage fraudpennsylvaniaproperty titleShapiro BursonAbigail FieldWed, 09 Mar 2011 13:30:00 ESTWhat the Mortgage Mess Settlement Proposal Really Meanshttp://www.dailyfinance.com/2011/03/09/what-the-mortgage-mess-settlement-proposal-really-means/http://www.dailyfinance.com/2011/03/09/what-the-mortgage-mess-settlement-proposal-really-means/http://www.dailyfinance.com/2011/03/09/what-the-mortgage-mess-settlement-proposal-really-means/#commentsFiled under: , , ,

Now that I've had a chance to read the mortgage mess settlement proposal I realize what it really is: a repudiation of the servicing industries' standard business practices.

Thankfully, it includes a couple provisions I was concerned were absent. Servicers have to show their math when announcing if a modification is denied, so the consumer can challenge the calculation, and foreclosures will no longer start with incomplete or fraudulent documentation. Those steps buttress other good provisions: banning foreclosures while modifications are negotiated and tried, and making trial modifications permanent after three payments.

While I'm glad those provisions are in the document, the term sheet is nonetheless pathetic. Repudiating the servicing industry's business model mostly means telling servicers they can't break the law and must act with basic good faith, such as crediting payments as of the day they were received and charging only one late fee for a late payment. As a result, the agreement reads as an indictment -- not just of the servicing industry, but also of law enforcement, regulators and Congress.

A Minimum Demand, Not a "Wish List"

It's not surprising that a public company focused on generating profits for shareholders and obscene pay packages for its executives would, when faced with a money-losing business line like mortgage servicing, cut every corner and exploit every possible advantage to turn it profitable -- even to the point of routine illegality, bad faith and unfair dealing. Or rather, it's not surprising that it would try; what is surprising is that government would let it succeed.

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Government has to play that watchdog role because what power does a single consumer have against a corporate Goliath? Particularly when that consumer has been stigmatized, and usually unfairly, as a "deadbeat". The situation has been particularly bad because so few can afford attorneys -- and when they are involved, attorneys aren't consistently awarded attorneys fees for their fraud-exposing efforts. Balancing out the radically unequal, structurally unavoidable distribution of power between borrower and mortgage servicer should be the job of the triumvirate of law, regulation and law enforcement.

But that trio has so far failed, given the impunity with which the servicing industry has operated its illegal, abusive business model. That abuse also makes a powerful, well-funded Consumer Financial Protection Bureau a consumer's last, best hope. It's also why it's crucial people not buy into the idea that this term sheet is a "wish list" that gets negotiated away from, as I did when I read the first media reports. This term sheet must be seen as the opposite: a minimum demand.

Better Enforcement Needed

Indeed, the term sheet must be strengthened, primarily its enforcement and principal reduction sections. The term sheet mostly amounts to insisting servicers obey the law -- so unless real teeth are added, why would anyone expect them to obey the law this time? In fact, Tom Adams at the blog Naked Capitalism notes that the proposal is a rehash of a 2003 settlement between subprime servicer Fairbanks and the Federal Trade Commission that was supposed to guide the servicing industry. I guess the industry didn't get the memo.

I mean, the servicers haven't even been honest during these negotiations: A consumer bankruptcy attorney who discussed some issues at length with the AG's executive committee was asked for evidence of current servicer misconduct. The servicers had told the committee that no one misapplied payments, charged multiple late fees for a single late payment or did any of several other abusive practices anymore. They insisted all that had stopped two years ago. But since these practices are still common, the attorney had no problem producing the evidence. (And these seemingly pathological liars have law firms that boast of "a deep and invaluable reservoir of credibility with courts, prosecutors and regulatory agencies nationwide.")

Who knows what other lies the servicers are telling? To stop servicer abuses, terms like those in the agreement will have to be enforced, especially giving borrowers the right to sue to enforce the agreement.

Reduce Mortgage Principal to a Home's Market Value

As for principal reductions: well, as punishment for the sevicers' lawlessness and the banks' role in inflating the housing bubble to feed the securitization machine, every underwater mortgage should have its principal reduced to current market value, without tax consequences to the homeowner, full stop. Force the banks to make investors whole when necessary; force the banks to pay the homeowners' income tax bills on the forgiven principal. Paying executives' tax bills is a common practice, after all.

The full power of the government must be brought to bear on the miscreant companies this term sheet is targeting -- to force them to heel and submit to a stronger version. Hold the sword of those so-richly-deserved financial penalties so close to their corporate necks that they capitulate. And if they don't capitulate, prosecute. Coerce them like the feds coerce criminals all the time: cooperate or we'll throw the book at you.

Mortgage Servicers Lie

So what does the term sheet expose about the lawlessness and abusiveness of the servicing industry's business model, that justifies such harshness?

First, the industry routinely lies to borrowers and courts.

How do we know? The term sheet says the banks' word is no good: every foreclosure -- to the maximum extent possible in nonjudicial states -- must be backed up by sworn statements. What must the servicers swear to? The basics: how much is owed, who owns the loan and efforts to avoid foreclosure via modifications or other steps.

And just how profoundly have the servicers been lying? Servicer dishonesty is so extreme that it's not enough to demand affidavits. The term sheet says:
"I.A.7. Affidavits and sworn statements, including their notarization, shall fully comply with all state law requirements.

8. Affidavits and sworn statements shall not contain information that is false or unsubstantiated."
Seriously, the lying was so bad they're telling the servicers to obey the law and not commit perjury.

Indeed the whole of section I.A. is the affidavit equivalent of a first grade civics lesson: Nothing fancy, just basic framework and rules. The person signing the affidavit has to know the information is true; the affidavit has to be complete, with any documents relied on attached; the person has to actually sign the document with a pen and date it; and the person's job title and employer have to be accurate ( so Lender Processing Services employees can't pretend to be vice presidents of a bank). Finally, the servicer has to take back all the fraudulent documents its already filed and, if it ever files another one, it has to tell the borrower.

It's offensive the big banks need to be told this stuff.

The Borrower is Nobody's Customer

Second, the term sheet means the industry's totally incompetent at the basics of mortgage servicing. Consider section I.B., which contains such basics as:

"Servicer shall... ensure accuracy and timely updating of borrower's account information, including posting of payments and imposition of fees. Servicer shall also maintain adequate documentation, including maintenance of the original loan files."

They need to be told to do that?

Or consider this provision: 45 days before starting a foreclosure, the servicer has to give the borrower "an itemized, plain language account summary identifying payments made, period of delinquency, late fees, and advances assessed...for at least the previous 36 months, along with a statement of the total amount needed to reinstate or bring the account current." John, a foreclosed-on Arizonan I profiled last November, would have given a lot for such a statement. But he never could get the bank to tell him what it was doing with his payments. You'd think it would be as simple as calling up a screen and hitting print. But it's so revolutionary it has to be part of a settlement term sheet.

The fact that servicers have been incompetent at keeping good records and communicating with borrowers effectively reflects the industry's structure: The borrower is nobody's customer, so why worry about the quality of the service? Servicers are paid by the banks that hire them. And those banks don't seem to care about the quality of their servicers' work, as HSBC's refusal to be accountable for its servicers' fraudulent foreclosures shows. The borrower has no ability to force a change in servicer, no control over who is picked. The borrower's powerlessness is again a core reason the term sheet is an indictment of government, and why America needs a strong and well-funded Consumer Financial Protection Bureau.

Really, Servicers Must Obey the Law

The section called "Documentation of Note, Holder Status and Chain of Assignment" also speaks to servicers' abysmal record-keeping and dishonesty.

It requires a foreclosing servicer to do something they've routinely failed to do: produce a copy of the note with all the correct endorsements and explain why it has the right to foreclose. The servicer also has to identify the "location of the original note, mortgage, and any interim assignments and/or allonges". (Incidentally, "and/or allonges" is disturbing, since allonges are supposed to be affixed to the original note.)

Perhaps realizing servicers won't be able to do this for potentially millions of properties, the term sheet says if any of the key documents aren't available, "Servicer shall comply with applicable law in any attempt to establish ownership of the note and the right to enforcement." Again with the "you must follow the law." Recognizing that servicers might find it most convenient to suddenly find none of the documents available, the term sheet continues, "Servicer shall be prohibited from intentionally destroying or disposing of original notes or like documents."

Another "you must follow the law" provision is II.E, which says servicers shall comply with the "Servicemembers Civil Relief Act (SCRA) and any applicable state law offering protections to servicemembers."

Rejecting the Business Model

The third thing that pops out from these pages is how many standard industry practices have had to be specifically prohibited.

A biggie: "2.k.8. Servicer's employees shall not instruct, advise or recommend that borrowers go into default in order to qualify for [a modification]."

Another rich target is the abusive fee practices of services. The practices are so bad it takes three pages to fully elaborate what can't be done, to flesh out that "All default and foreclosure-related service fees, including third-party fees...shall be bona fide, reasonable in amount, and disclosed in detail to the borrower". Another provision goes to the lack of fair dealing: "Servicer shall not assess any default, foreclosure-related or bankruptcy-related fees while a completed loan modification application is under consideration or being performed as a trial modification."

The term sheet also addresses all the bad practices that result from the outsourcing of foreclosures. Indeed, Section 1.E.2 should be nicknamed the "Lender Processing Services section", since many of the provisions are aimed at it and its less successful competitors. Note to LPS shareholders -- it's an ominous sign when the term sheet points out that companies like LPS have to "comply with applicable rules and regulations (including prohibitions on fee splitting.)" It's also beyond pathetic, albeit necessary, that the term sheet has to instruct servicers to create "escalation procedures to allow attorneys... to communicate directly with Servicer."

Elsewhere, the term sheet makes a backhanded reference to LPS's infamous speed-based rating system of foreclosure attorneys. It warns that robo-signing is bad, so don't incentivize speed at the price of accuracy. Finally, servicers can't outsource responsibility: They have to review the documents their vendors and lawyers create and file.

Another slimy servicer practice is taken on: purchasing insurance on behalf of the homeowner, aka "force-placed insurance." The premiums for such insurance have sent current borrowers into default.

Check out these provisions: no buying insurance if the servicer "knows or has reason to know that the borrower has a policy in effect"; the servicer can't get more insurance -- at a higher premium, of course -- than the property is worth; and the servicer can't buy the insurance from its own subsidiary or affiliate or receive a kickback for referring a homeowner for a policy. The servicer has to tell the borrower it has bought insurance and how he can prove he has insurance already. Finally, the servicer has to refund the borrower any premiums it charged for unnecessary insurance.

Forcing A Hiring Spree

The fourth issue that becomes obvious is the amount of hiring the banks will have to undergo, to in order to comply. That hiring should make a meaningful dent in the unemployment rate. The term sheet demands adequate staffing, mandates several new borrower services, and sets basic standards for theoretically existing ones. The banks may not have enough employees to do regular banking; but boy would they have to staff-up to comply with the term sheet.

The final thing to mention at this point is the term sheet punts on MERS (Mortgage Electronic Registration Systems) for now. And that's too bad.

In sum: the scale of bank lawlessness and abuse of borrowers is so epic that far more than this term sheet is needed. The AGs and the rest need to find their backbone and recognize they should be giving dictation, not negotiating away from a term sheet that's at best a minimum demand.

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]]>banksforeclosure crisisForeclosureshomeownershomesmortgage messmortgage scandalmortgagesreal estaterobosigningAbigail FieldWed, 09 Mar 2011 00:20:00 ESTDavid Stern, the Foreclosure King, Surrenders His Crownhttp://www.dailyfinance.com/2011/03/07/david-stern-foreclosure-king-surrenders-crown/http://www.dailyfinance.com/2011/03/07/david-stern-foreclosure-king-surrenders-crown/http://www.dailyfinance.com/2011/03/07/david-stern-foreclosure-king-surrenders-crown/#commentsFiled under: , , , ,

David Stern, the foreclosure kingDavid J. Stern is winding up his infamous foreclosure practice, reports the Associated Press, citing a Securities and Exchange filing. The law firm's fall has been swift and steep, and it offers many reasons for schadenfreude: Stern lived the high life on the backs for borrowers foreclosed on with fraudulent documents, borrowers who weren't consistently given notice they were being foreclosed on. His firm's fall has exacerbated the problems in the Florida court system because his cases are being transferred to other lawyers who must now get up to speed on them.

But there's one thing his fall isn't, much as I wish it were, and that's the end of an era.

If we're to restore the rule of law in foreclosure cases, it's going to take a lot more than the fall of Stern's firm, which is just one of several "foreclosure mills" in Florida. Others are under investigation. Maybe some of them will fall too. Maybe not.

But the issue runs nationally, not just in Florida. Lender Processing Services (LPS) alone has hundreds of "network firms" following its due-process-abusing practices. A firm in Pennsylvania may have jeopardized thousands of foreclosures there by having nonlawyers do the cases. And the situation in nonjudicial states, where even foreclosure mills aren't necessary to take back homes, is worse.

If anyone hearing of the Stern firm's demise mistakes it for news that change has really come to the foreclosure world, that will be saddest news of all.

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]]>david sternflorida foreclosureforeclosure crisisForeclosureslegal affairsrobo-signersAbigail FieldMon, 07 Mar 2011 16:30:00 ESTThe Mortgage Mess Settlement Proposal: Off to an Awful Starthttp://www.dailyfinance.com/2011/03/07/the-mortgage-mess-settlement-proposal-too-weak-to-succeed/http://www.dailyfinance.com/2011/03/07/the-mortgage-mess-settlement-proposal-too-weak-to-succeed/http://www.dailyfinance.com/2011/03/07/the-mortgage-mess-settlement-proposal-too-weak-to-succeed/#commentsFiled under: , , ,

Over the weekend, Bloomberg, The New York Times and The Wall Street Journal reported on a proposal for a partial settlement of the mortgage mess offered by a group of state attorneys general and federal regulators. The document apparently addresses mortgage servicing, modification and foreclosure practices, but its focus is strictly on banks' future behaviors. A theoretical punitive bunch of fines for bank misbehaviors and a process to modify more mortgages and reduce borrowers' principal waits in the wings.

Presumably, the logic involved in floating this proposal is similar to the methods by which prosecutors get lesser criminals to cooperate by testifying against bigger fish: The deal to reduce the otherwise-deserved penalty is based on the degree of cooperation the witness provides.

Unfortunately, the proposal as it has been described so far is a joke. The requirements for banks aren't strong enough, and yet The Wall Street Journal refers to them as a "wish list." All the coverage portrays the document as the starting point for "difficult" negotiations, implying that the final document will be even weaker.

For context, let's start by looking at what the proposal reveals about how wrongheaded current bank practices are.

Banks Don't Even Know How Much Homeowners Owe

The Journal reports that the "document also spells out steps for banks to verify the accuracy of amounts owed." Why should state and federal law enforcement have to tell banks how to verify how much people owe them? Because the processes banks currently use don't work.

That's right: As homeowners' attorneys and advocates have been saying for years, the banks are often wrong about even such basic facts as how much they're owed. And that's not just because banks load up "junk fees" and other false charges to inflate the balance. To get a glimpse of the chaos that is bank records, consider my report from a few months ago, especially the Bogar case, or Dana Milbank's recent story of his family's experience. Or consider Linda Almonte's claims in the context of credit card debt.

Why is the industry plagued with such widespread incompetence? Perhaps because the only players who can fire a servicer are the banks that hire them, and those banks and trustees for securitized trusts don't seem to care about servicer incompetence. (Consider that HSBC washed its hands regarding its servicer's use of robo-signers and said its foreclosure moratorium didn't include cases brought by its servicers, despite the fact that those foreclosures are being undertaken for HSBC.) If homeowners could fire loan servicers for incompetence, and if there were a competitive marketplace, servicer competence would skyrocket. But nobody is proposing giving homeowners that kind of power.

So, instead of dictating a process for verifying accuracy, what would a strong proposal look like on this point? How about this: Any homeowner able to show -- after discovery -- that their servicer is wrong about what they owe gets paid triple the amount of the error as punitive damages, plus attorney's fees. No one cares precisely how the verifying is done. We care that it's done accurately, and we can only be sure it will be if there's a strong incentive.

How MERS Created a Clouded-Title Nightmare

Beyond banks' failure to keep track of how much they are owed, lenders have also failed to track their promissory notes and the mortgage documents. They really don't have a handle on where these valuable documents are -- the paperwork that proves who is owed the debt and who has the right to foreclose. As a result, The Journal reports, "The document also includes a list of directives to improve tracking of mortgage notes and the chain of title..."

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A big reason for that is MERS, the private database for tracking mortgage servicing rights, and sometimes, ownership of loans. The MERS database is updated only when its members choose to update it, so a mortgage can change hands multiple times without any of the transactions being recorded. Another MERS problem -- it's not legal everywhere. Judges across the country have ruled against it (though some have ruled for it). As a result, we're left with one of the big clusters of chaos in the foreclosure mess: MERS and its vast array of clouded title issues.

A couple of weeks ago, I wondered if, when MERS was designed, the lawyers involved had researched its interplay with each of the 50 states' laws. After all, real estate law is handled at the state level. This weekend, The New York Times revealed in a longer piece on MERS that the firm in question, Covington & Burling -- a law firm with deep roots at the U.S. Justice Department -- didn't do that analysis. The Times quotes a government official as saying: "So as far as anyone can tell their real theory was: 'If we can get everyone on board, no judge will want to upend something that is reasonable and sensible and would screw up 70 percent of loans.' "

The arrogance behind that theory is breathtaking, and not just because it amounts to: "Who cares if MERS violates the law, if we get enough mortgages in it, the consequences of enforcing the law will be too great for anyone to try." It's even worse, because the claim is that MERS is "reasonable and sensible."

A database that doesn't require ownership to be tracked, that has no quality control for data entry and which is frequently wrong (The Times article says that fewer than 30% of the loans in the database had accurate records) is reasonable and sensible? Only if you're the banks that used this shoddy mess to avoid paying millions in recording fees to local governments.

A Standard of Carelessness

MERS isn't the only reason the banks' records are screwy and title problems are multiplying. Standard practices appear to have violated the terms of securitization contracts and the Uniform Commercial Code.

If you think about it, it's amazing -- and appalling -- that law enforcement should have to tell banks to keep better track of mortgage notes and their ownership. When the Massachusetts Supreme Judicial Court got a close-up view of the banks' practices, it expressed shock: "[W]hat is surprising about these cases is. . .the utter carelessness with which the plaintiff banks documented the titles to their assets."

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Another indicator of just how bad things are is that the attorneys general felt it necessary to include a requirement that servicers provide a single point of contact for a homeowner so they don't get endlessly passed around and to set deadlines for such basic customer-service duties as acknowledging a modification application was received (10 days) and notifying the borrower the application was rejected (30 days).

The few good aspects of the proposal don't go nearly far enough, particularly for a document that is supposed to be an best-possible-outcome wish list.

For example, banks reportedly will have to make a trial modification permanent if the homeowner makes three payments successfully. On its face, that would be a huge improvement. Many are the horror stories of homeowners being foreclosed upon after making successful trial payments far beyond the initial window: Consider the story of the Galvans, about whom I reported a couple of months ago.

But a much better version of this proposal would start with changing how banks make their initial modification offers.

The Mortgage Modification Dance of Confusion

The banks' analysis of whether or not a homeowner qualifies for a HAMP modification, a proprietary modification or no modification is a mysterious black box that seems to produce different results for the same homeowner at different times, and not just because the banks repeatedly request new financial information. If all the agreement going forward does is force the banks to make successful trial mods permanent, but doesn't bring some clarity to how the decision is made to offer a modification, banks will be able to minimize the impact simple by offering fewer trial modifications.

According to The Journal and Times articles, the only part of the proposal that addresses the question of who qualifies for a mortgage modification says: The banks would be forced "to consider offering loan write downs on under-water borrowers more regularly..." and: "mortgage balances would be cut in "appropriate circumstances."

Forced to "consider" offering? Pretty weak. "Appropriate" as defined by whom? The banks whose incompetence got us to this point, or the law enforcers who don't seem determined to do a thorough investigation before cutting a deal? Somehow, I doubt it will be "appropriate" as defined by common sense.

Here are some commonsense circumstances under which a principal reduction to current market value is appropriate: Any loan that the banks failed to underwrite, whether it issued the loan without proof of the borrower's income, or proof of the borrower's assets, or of the borrower's income and assets, or even the fact that the borrower had a job. Any loan made on an inflated appraisal, when the appraiser wasn't independent of the bank making the loan and/or the bank had other reasons to think the appraisal was inflated. And to get punitive: any loan to which the servicer has failed to appropriately credit payments, or for which they have otherwise failed at the basic tasks of mortgage servicing.

(Of course, if the bankruptcy code made it as easy to keep a home as it does to keep yachts, limos and vacation properties -- as it once did for homes and still does for family farms -- all homeowners willing to go bankrupt could get their principal reduced to market value. But while a legislative fix to the bankruptcy code is a real enough possibility to prompt a warning from Wells Fargo, it's not likely.)

Blocking the Mortgage Modification Bait-and-Switch

Here's one strong part of the proposal, but even it doesn't go far enough: Forbidding foreclosure while a modification is being considered. While that step alone would be a huge relief by ending the banks' current bait-and-switch methods ("Ignore those pesky foreclosure notices," the banks say, "your modification's almost approved. . .oh wait, we're selling your house next week. Didn't you get the letters?"), the requirement would be much more powerful and useful if it were coupled with a rule preventing the banks from initiating foreclosure proceedings if they don't have all their paperwork in order and weren't really ready to proceed.

Foreclosure volume is drowning courts wherever foreclosures require them to be involved. And yet the banks aren't moving the cases forward because they don't have their acts together. Allowing such filings wastes judicial resources, tax dollars and unnecessarily punishes homeowners. Making a "don't file until you're really ready" requirement would also force the banks to do real oversight of the third-party providers and foreclosure counsel they've outsourced the work to, which would be a great thing considering how lousy those entities' practices have been.

Finally, any deal must be enforceable by homeowners. They must be explicitly named "third-party beneficiaries" and be given the right to sue to enforce the agreement's terms. That would ensure compliance by the banks.

So there you have it: We live in a world where banks have failed at the most basic jobs of mortgage servicing to such a breathtaking extent that the titles to millions of properties are clouded and our courts are clogged with suspended and fraudulent foreclosures. And the full scope of the problem has yet to be revealed.

Yet somehow, in spite of this, all the key law-enforcement officers and regulators, working together, have come up with a starting proposal that doesn't even tackle the major parts of the problem. Since we have no reason to expect an end result better than this proposal, and every reason to expect less, that's heartbreaking.

And it just confirms the cynicism that the banks play by a different set of rules than the rest of us do.

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]]>AttorneysGeneralbankruptcybanksclouded titleCovington Burlingforeclosure crisisForeclosuresHAMPhomeownersHSBCloan modificationloansMERSmortgage fraudmortgage modificationmortgagesprincipal reductionRegulatorsrobo-signersservicersAbigail FieldMon, 07 Mar 2011 16:00:00 ESTWhat Do HSBC's Foreclosure Moratorium and Robo-Signing Claims Really Mean?http://www.dailyfinance.com/2011/03/04/hsbc-foreclosure-moratorium-robo-signing-claims/http://www.dailyfinance.com/2011/03/04/hsbc-foreclosure-moratorium-robo-signing-claims/http://www.dailyfinance.com/2011/03/04/hsbc-foreclosure-moratorium-robo-signing-claims/#commentsFiled under: , , ,

In HSBC's 2010 annual report, the bank asserted that it had stopped "processing foreclosures" and that it "suspended foreclosures" in December, even though the information wasn't made public until Feb. 28, when HSBC (HBC) filed the report with the SEC.

But based on at least two cases still working their way through Florida's courts, that delay in disclosure apparently also meant that HSBC didn't tell attorneys bringing foreclosure actions in the bank's name to put their cases on hold. Indeed, if HSBC had systematically put its many pending foreclosure cases on hold in December, the news surely would have come out before now. So it's appropriate to ask: What does the moratorium announcement really mean?

HSBC has also repeatedly asserted that it doesn't robo-sign. Despite those denials, HBSC's annual report concedes foreclosure document problems that certainly sound like those caused by robo-signing: "certain deficiencies in the processing, preparation and signing of affidavits and other documents supporting foreclosures. . .including the evaluation and monitoring of third-party law firms retained to effect our foreclosures."

Even if that language refers to something other than robo-signing -- and frankly, anything else it could refer to would be worse -- the servicer foreclosing in HSBC's name in the two cases below is using robo-signed documents. So, is it really valid to say HSBC doesn't robo-sign? (That's a claim the bank made again this week, after the annual report was released.)

What Else Can This Mean?

The two issues are linked, because the document "deficiencies" were significant enough to trigger HSBC's alleged moratorium: "We have suspended foreclosures until such time as we have substantially addressed the noted deficiencies in our processes," wrote the bank. "We are also reviewing foreclosures where judgment has not yet been entered and will correct deficient documentation and re-file affidavits where necessary."

As far as I can tell, there's no way to manipulate those sentences to mean: "We've got real problems with our documents, but we're going to let all our pending cases go forward -- we just won't file new cases until we've solved our problems." But based on how easy it was to find two HSBC foreclosure cases involving robo-signed documents that aren't on hold, and the fact that the "moratorium" didn't become public in the first few months of its existence, it seems that interpretation is closer to the truth.

HSBC had not replied to a detailed request for comment by deadline. If it replies, we will update this story.
UPDATE: Late Friday afternoon, Neil Brazil, HSBC North America's vice president of public affairs, responded: "In cases where HSBC is acting solely as trustee for a trust which holds a mortgage loan, HSBC does not service those loans, a master servicer does and has the authority to handle matters such as foreclosures. You would need to review any foreclosure matters with them."

The statement about the master servicer is true, of course -- but irrelevant. Even in those cases, the foreclosures are being done in HSBC's name, and the proceeds go to the trusts HSBC administers. For the bank to wash its hands of what its agents are doing in its name just doesn't fly. To illustrate the point, let's take a look at those two active foreclosure cases in Florida.

Two Cases that Challenge HSBC's Storyline

In two active Florida cases, Wells Fargo is trying to foreclose as the loan servicer for HSBC, which is the plaintiff and will, if the foreclosures are successful, get the properties. The case names reflect HSBC's role: HSBC v. Harley, and HSBC v. Shinneman. Both are set for trial later this month, and as of March 3, had not been not affected by HSBC's foreclosure moratorium.

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Jacksonville Legal Aid attorney April Charney represents Harley, while attorney Todd Allen represents Shinneman. Both reached out to their opposing counsels repeatedly after the HSBC moratorium became public. Both opposing counsels told them on Thursday that the cases were going forward. (When I contacted the attorney for HSBC in the Shinneman case, Travis Harvey, his response was "no comment." HSBC's attorney in Harley, Michael Winston, didn't reply to my email.)

It has been three months since December, when HSBC says it began its "moratorium." Surely the bank has a list of all the foreclosure actions being taken in its name. In the age of email, sending a mass communique to all the necessary parties to halt those foreclosures shouldn't take this long.

Robo-Signed Documents in HSBC Cases

In Shinneman, the affidavit of indebtedness -- the document HSBC gives the court to prove how much Shinneman is in default, justifying the foreclosure -- is signed by known robo-signer Xee Moua (see pp. 28-29). If you look at the document, don't be confused by the fact that Moua says she works for Wells Fargo. Wells services the loan, but it's HSBC foreclosing -- check out the case caption on the top of the document. So, even if the robo-signer acted at Wells Fargo's request, the robo-signed document is being used by HSBC to foreclose on a home.

Similarly, in Harley, the assignment of mortgage was signed by Cheryl Samons of the infamous David Stern law firm, also a known robo-signer. Again, the assignment is from Wells to HSBC via MERS, but that doesn't insulate HSBC from the robo-signing. First, MERS assignments of mortgage are often done by employees or agents of the company receiving the assignment. In this case, that's HSBC. But even if Wells created the robo-signed assignment (by hiring Stern), the document is still being used by HSBC to foreclose on the home.

HSBC's annual report asserted the purpose of the foreclosure moratorium was in part to review and correct documents in pending foreclosure actions. Both the Shinneman and Harley cases are ones HSBC might want to review. The homeowners in each have challenged the validity of the papers, specifically the right of HSBC to foreclose.

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In Harley, the mortgage was securitized, and the homeowner argues the securitization contracts prevented HSBC from taking ownership of the loan in January 2006, when it claims it did. Beyond that, the robo-signed assignment of mortgage from MERS also supposedly assigned the promissory note, though it's unclear how that can be because MERS doesn't own notes. Most basically, the assignment was signed after the foreclosure had begun, and in Florida a plaintiff must have the right to foreclose when it file suit. Plaintiffs can't "fix" the issue later.

In Shinneman, among other issues, the note was not endorsed in a way that gave HSBC standing when the foreclosure was filed. Recently, however, a version with a new endorsement has appeared. (New endorsements have appeared in many foreclosure cases across the country.)

What Does "We" Mean?

So again I ask: What does the bank's moratorium really amount to? And will HSBC continue to insist it isn't robo-signing documents? If so, what were the document "deficiencies" it disclosed in its annual report? And how does it justify the statement in light of robo-signed documents being used in its name to foreclose?

HSBC's "we don't robo-sign" is as lawyerly an evasion as President Bill Clinton's infamous line, "it depends what the meaning of the word 'is' is." In this case, the bank appears to be trying to skate away on the definition of the word "we." But paying someone else to do the robo-signing and foreclosing for you doesn't get you off the hook.


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]]>bankdocumentationfloridaflorida real estateforeclosure fraudforeclosure moratoriumForeclosureshsbcHSBC annual reportMERSmortgage fraudrobo-signersrobo-signing scandalsecuritizationWells FAbigail FieldFri, 04 Mar 2011 12:00:00 ESTAre Banks Abandoning Foreclosures in Florida?http://www.dailyfinance.com/2011/03/03/are-banks-abandoning-foreclosures-in-florida/http://www.dailyfinance.com/2011/03/03/are-banks-abandoning-foreclosures-in-florida/http://www.dailyfinance.com/2011/03/03/are-banks-abandoning-foreclosures-in-florida/#commentsFiled under: , ,

If you sue someone in Florida but then stop pursuing your case for a year, the court can clear its case load by dismissing your suit for "failure to prosecute." Across Florida, courts are starting to clear their overwhelmed dockets by dismissing foreclosure cases the banks have failed to prosecute. In one division of one of Florida's 20 judicial districts, perhaps as many as 2,700 cases have been set for dismissal in one week.

When Allison Albert of the Jacksonville area Legal Aid went to foreclosure court in Duval County, part of the Fourth Judicial Circuit, on Tuesday, hundreds of "failure to prosecute" cases were on the docket. While waiting for her client's case to be called, she heard the court's staff talking about how the court had sent out notices, scheduling hearings for about 2,700 foreclosure actions -- and noting that if the bank didn't take action within 60 days of the notice, the case could be dismissed at the hearing for failure to prosecute. All of the cases were scheduled to be heard over the next eight court days.

Resetting the Legal Clock

Of course, not all those cases will be dismissed. After the notice went out, some banks responded by voluntarily dismissing the cases. But others took some action, like filing papers -- which is what happened in Albert's 2006 foreclosure case. Filing papers resets the legal clock, and on Tuesday morning four attorneys were present -- representing the banks and appearing in multiple cases; presumably to have the clocks on their cases reset, as well.

"I've never seen a case dismissed for failure to prosecute," says Todd Allen, an attorney practicing in Lee and Collier Counties. "So I wouldn't put too much faith in that 2,700 number. In my experience judges are very deferential to the banks, so if the banks' attorneys show and say that they intend to proceed -- even if they haven't filed any papers in the 60-day window after notice -- the judges will just let them continue the case."

The Reasons Behind the Delays

Regardless of how many of the 2,700 cases are ultimately dismissed for failure to prosecute, the point is the banks are still sitting on thousands of cases, and not moving them forward. As Lee Haworth, Chief Judge for the 12th Judicial District, noted, "the plaintiffs still largely control the process."

So why aren't these cases going forward? One reason is the foreclosure moratoriums that were put in place following the robo-signing scandal last year -- some of which have since been lifted; another is the banks' documents are a mess from robo-signing and the like; a third is the mass shifting of cases away from the Stern law firm and the delays that come as other firms get up to speed. But whatever the reason, filing cases and then not prosecuting them is a big waste of judicial resources. Voluntarily dismissing the cases after several months on the docket is only a little better, particularly if the court had to spend that time and money sending notices out to all parties involved, and telling the plaintiffs to take action or face dismissal.

Massive Case Backlog

As of December 31, Florida's courts had a backlog of some 350,000 foreclosure cases. Amazingly, that's down from 462,000 on July 1. But much of the reduction is from dismissals, and those are cases that surely will come back.

"I think they should start charging an upfront fee for the eventual failure to prosecute," says April Charney, an attorney with Jacksonville Legal Aid. "There needs to be some absorption of the cost burden these cases put on the courts."

Florida courts need to do something, surely -- and the banks shouldn't be coming to court unless they're actually ready to proceed.

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]]>failure to prosecutefloridaforeclosureforeclosure crisisforeclosure fraudreal estaterobosigningAbigail FieldThu, 03 Mar 2011 17:30:00 ESTThe Risks of the Mortgage Mess: The Banks' Viewhttp://www.dailyfinance.com/2011/03/02/the-risks-of-the-mortgage-mess-the-banks-view/http://www.dailyfinance.com/2011/03/02/the-risks-of-the-mortgage-mess-the-banks-view/http://www.dailyfinance.com/2011/03/02/the-risks-of-the-mortgage-mess-the-banks-view/#commentsFiled under: , , , , ,

The risk disclosures in banks' annual reports make for interesting reading that sheds some light on their attitudes toward the mortgage mess.HSBC (HBC) got plenty of attention when it disclosed that it had suspended foreclosures in its annual report Monday. But its annual report -- as well as other big banks' reports -- also contained plenty of additional nuggets about the mortgage mess, especially in the risk disclosures, which are required to be written in plain English and to include "the most significant factors that may adversely affect the company's business, operations, industry, financial position or future financial performance."

I waded through the recently filed annual reports from Bank of America (BAC), JPMorgan Chase (JPM), Citigroup (C), Wells Fargo (WFC) and HSBC to see how each institution framed the threat that the mortgage mess and the foreclosure crisis pose to their businesses.

You'd expect to see plenty of similarities. After all, in general, the risks are well-known and common to all of those banks. For example, investors could force the banks to buy back securities; law-enforcement investigations could be costly; foreclosure problems could increase costs and losses; and lawsuits of every type could crop up.

Nonetheless, the differences in substance and style were striking, speaking volumes about the banks' attitudes toward the risks. Bank of America gives comprehensive, detailed disclosures. HSBC and Wells Fargo are also reasonably detailed. Chase is more succinct and vague, but doesn't downplay the risks. Citi is as brief as Chase, but uses a more aggressive, self-assured style that comes across as almost dismissive of the risks.

The banks' responses to requests for comment were likewise varied: HSBC and Bank of America provided comment, as discussed below. JPMorgan Chase's spokesman simply said "the disclosure lays out the facts for investors" and that additional detail was available from its recent "investor day." Wells Fargo spokeswoman Mary Eschet said the "disclosure speaks for itself." And Citi spokesman Jon Diat declined to comment.

Here's a discussion of each bank's disclosures and what it reveals:

HSBC: Document 'Deficiencies'

In its annual report, HSBC casually mentions the previously unannounced foreclose moratorium as part of a discussion of its growing foreclosure inventory: "Despite our cessation in processing foreclosures in December, our inventory of foreclosed properties continued to increase."

The foreclosure freeze may not be the only sotto voce announcement HSBC made in its annual report. In its risk disclosures, HSBC says two different regulators sent it letters "noting certain deficiencies in the processing, preparation and signing of affidavits and other documents supporting foreclosures. . .including the evaluation and monitoring of third-party law firms retained to effect our foreclosures."

That sounds suspiciously like robo-signing, or automatically signing documents without verifying their accuracy. But consistent with past HSBC statements, bank spokesman Neil Brazil insisted in an interview that HSBC didn't use robo-signers.

If that sentence wasn't about robo-signing, I asked, what "deficiencies" in the preparing and signing the affidavits does it refer to? Brazil stuck with the "we-don't-robo-sign" line, but didn't have an answer to the question.

Frankly, any answer that's not an admission of robo-signing would be worse. Does the sentence mean the documents were properly verified and signed, but HSBC's databases are so bad that the documents were wrong nonetheless? I mean, if that risk-factor language isn't an admission of robo-signing, what is it?

Also in its risk disclosures, HSBC says it's in discussions with regulators that would fix its foreclosure processes going forward. It faces the risk of costs associated with its foreclosure problems, as well as related litigation, general economic risk and risks related to mortgage securitization. It also notes that the foreclosure delays could hurt the housing market -- vacant properties can push down property values -- and thus HSBC.

Bank of America: Serious Details on Putbacks and Liability

Bank of America's annual report, filed on Feb. 25, devotes an entire section devoted to "Mortgage and Housing Related Market Risk." And topping that section's list is the risk that investors could force the bank to buy back mortgage-backed securities.

Fannie Mae, as well as private investors, have been trying to force banks to take back their junk mortgages. "The resolution of these claims could have a material adverse effect on our cash flows, financial condition and results of operations," Bank of America notes. A massive amount of money must be at stake for the gargantuan bank to consider those claims a material risk.

Further housing-market declines, including lower home prices, could hurt its mortgage business and -- perhaps more important -- worsen the risk of litigation over the mortgage and securities buybacks, potentially having "a significant adverse effect on our financial condition and results of operations," Bank of America says.

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Its language indicates that Bank of America is taking these risks seriously. When it discusses its risks related to its foreclosure problems, including its temporary moratorium and ongoing investigations about its foreclosure process, it again stresses the seriousness of the risk: "Those investigations and any irregularities that might be found in our foreclosure processes, along with any remedial steps taken in response. . .could have a material adverse effect on our financial condition and results of operations."

The bank is similarly straightforward in acknowledging many other risks, including its potential liability related to mortgage servicing and the possible damage to its reputation resulting from its foreclosure and mortgage-modification practices.

But the scariest risk in the report wasn't directly related to mortgages or foreclosures. Its very first risk, printed in the biggest font, is "Liquidity Risk," which translates into something like 'the risk that we'll need another bailout."

The detailed disclosures are typical of the company, according to Bank of America spokesman Jerry Dubrowski. "Over the last year, we've tried to be responsive to investors and their requests for information about our mortgage business, primarily," he says.

"I think if you listen to or look at the investor presentations or all of our SEC filings [and] our conference calls, we have spent a lot of time talking about our mortgage business, about repurchase claims, about foreclosures and modifications. And hopefully that information allows investors to better understand our business and the challenges we face."

Wells Fargo: Comprehensive, but Hard to Find

Wells Fargo's discussion of the risks posed by the mortgage mess also is fairly comprehensive. Like Bank of America, Wells admits buyback risks, as well as risks stemming from its mortgage-servicing practices and foreclosure practices.

One risk in particular is sure to warm the hearts of distressed homeowners. Wells warns that bankruptcy law might be changed to let a judge reduce the principal balance on an underwater mortgage, or one in which the buyer owes more than the property is worth, to the home's actual value. (That type of reduction -- called a cram down -- is currently allowed for limos, yachts and vacation homes, but not for primary residences.)

In case you're hoping to examine the risk disclosures yourself, you should note that Wells Fargo's disclosures are hard to find. The document labeled as the annual report on the Securities and Exchange Commission website is only 32 pages long, but the rest of the report -- and the part containing these mortgage risks -- is attached as Exhibit 13.

Chase: Robo-Signers Were Chase Employees

Like Bank of America and Chase, JPMorgan Chase discussed the risk of mortgage repurchases in its annual report. While Chase is sanguine that its reserves are appropriate, it includes a stark warning that it could be wrong.

In 2010, the cost of repurchasing mortgage loans from Fannie Mae and Freddie Mac "increased substantially" and could "continue to increase substantially," it says, adding that buybacks "could materially and adversely affect the Firm." It also notes that it faces substantial litigation related to its mortgage-backed securities.

More unique is Chase's disclosure about its foreclosure moratorium, which is has -- for the most part -- lifted. While it gives no details about which foreclosures are still suspended or how much of its foreclosure review has been completed, Chase says the moratorium was triggered by "questions about affidavits of indebtedness prepared by local foreclosure counsel, signed by Firm employees." Firm employees? Really?

It's a daring assertion. One of the hallmarks of the robo-signing scandal has been so-called bank "vice presidents" who have never received a paycheck from the bank, set foot in the bank's offices or reported to anyone at the bank. Instead, they really work for Lender Processing Services or its kin, signing documents according to corporate resolutions.

It's possible that Chase never outsourced its robo-signing. Certainly some robo-signers have been bank employees, such as Wells Fargo's John Kennerty. But I'd be surprised if all of Chase's robo-signing took place in-house.

Finally, Chase leaves investors with a warning about the various foreclosure-related investigations it faces: "The Firm is cooperating with these investigations, [which] could result in material fines, penalties. . .default servicing or other process changes. . . . or other enforcement actions, as well as significant legal costs. . . . The Firm cannot predict the ultimate outcome of these matters or the impact that they could have on the Firm's financial results."

Citigroup: Blaming the Whistleblowers

Citigroup's annual report, filed on Feb. 25, yields one long risk factor discussing both the mortgage buybacks and foreclosures. The bank says it has nearly $1 billion in reserve to buy back Fannie Mae and Freddie Mac mortgage-backed securities, and it thinks the liability for "private-label" securities is smaller. But it warns that the risk could grow as more lawsuits are filed.

Its language about other risks differs from that of the other banks, however. For example, it says the robo-signing scandal, questions about the securitization process, and all the law enforcement and regulatory attention that's ensued "has resulted in, and may continue to result in, the diversion of management's attention and increased expense, and could result in fines, penalties. . .principal reduction programs, and significant legal, negative reputational and other costs."

Diversion of management's attention? If management had been on the ball to begin with, these risks would never have been created. The most galling facet of the mortgage mess has been how avoidable it's been. I mean, who decides to employ robo-signers? Management. Who decides to use foreclosure mills and not supervise them? Management. Who decides to buy and securitize fraudulent mortgages? Management.

What exactly is this regulatory scrutiny diverting management's attention from? Figuring out the next way to maximize short-term gain (i.e. management compensation) at the expense of sound long-term business practices? Get real.

On the foreclosure front, Citi seems even less concerned, beginning with a claim that its "current foreclosure process is sound." Note the word "current." Citi does acknowledges that further "deficiencies" could "materialize," and that the whole industry could be hit with damaging regulatory or judicial actions. The primary threat that Citi sees is an increase in its foreclosure backlog, which would increase costs and reduce revenues.

Finally, in a risk factor unrelated to the mortgage mess, Citi warns that of another potential management diversion: whistleblowers. It says the Financial Reform Act's whistleblower provisions "provide substantial financial incentives for persons to report alleged violations of law," and adds that these provisions "could increase the number of claims that Citigroup will have to investigate or against which Citigroup will have to defend itself, and may otherwise further increase Citigroup's legal liabilities."
Citi is the only bank that mentioned this risk. Apparently, none of the other banks were worried enough about whistleblowers to include it. Although I'm not sure Citi is all that worried. The language reads more like a company annoyed with government meddling in its business.

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]]>bankBank of AmericabankingbankschaseciticitigroupCitigroup Inc.foreclosureforeclosure crisisforeclosure fraudForeclosureshsbcHSBC HoldingsJPMJpMorganJPMorgan Chasemortgagemortgage backed securitiesmortgage defaultsmortgage fraudMortgage messmortgage modificationmortgagesrobo-signersrobo-signingrobo-signing scandalrobosignerrobosigningwells fargoWells Fargo BankAbigail FieldWed, 02 Mar 2011 22:30:00 ESTSupreme Court Sides with Employees, Againhttp://www.dailyfinance.com/2011/03/01/supreme-court-sides-with-employees-again/http://www.dailyfinance.com/2011/03/01/supreme-court-sides-with-employees-again/http://www.dailyfinance.com/2011/03/01/supreme-court-sides-with-employees-again/#commentsFiled under: , ,

Earlier this year the U.S. Supreme Court interpreted an anti-employment discrimination statute in a pro-employee way. On Tuesday the Court did it again, in Staub v. Proctor.

Staub is a U.S. Army reservist who worked at Proctor Hospital in Peoria, Ilinois. His supervisor and his supervisor's supervisor were reportedly hostile towards his military service and the demands it placed on Staub's time. According to Staub, and the jury that agreed with him, his supervisors decided to get rid of him -- by manufacturing a rule and Staub's supposed violation of that rule to justify his firing.

Jury Verdict Vacated

Although his supervisors did not have the power to fire him, the person that did explicitly referred to Staub's alleged rule-breaking to justify his firing. As a result, the jury found that Proctor Hospital violated a 1994 statute, the Uniformed Services Employment and Reemployment Rights Act.

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But the Court of Appeals for the Seventh Circuit vacated the jury's verdict for Staub. The higher court found that, as a matter of law, the supervisors didn't have enough influence over the decision to fire Staub for their anti-military bias to matter. But the Supreme Court unanimously reversed that decision, with an opinion by Justice Scalia and a concurring opinion by Justices Alito and Thomas. (The unanimous vote was 8-0 because Justice Kagan recused herself.)

The Court held the person doing the actual firing need not be anti-military. The employer, according to their ruling, was liable if an anti-military supervisor does something that is intended to cause a higher-up to fire a military employee (or take some other adverse employment action) -- and that the bias-driven action triggers the firing. So Proctor Hospital could be liable for the anti-military supervisors' efforts "to get rid of" Staub -- because the firing decision appeared to be based on those supervisors' reports.

'A' Motivating Factor vs. 'The' Motivating Factor

Although Justices Alito and Thomas agreed that Proctor Hospital could be liable to Staub, they wanted the Court to hold that the person doing the actual firing had to be motivated by anti-military bias. The reason they agreed Proctor Hospital could be liable is that the person who fired Staub failed to investigate his complaint -- that Staub's supervisors were motivated by anti-military bias. Since that person didn't investigate, she effectively delegated the decision to fire to the biased supervisors. As a result, Justices Alito and Thomas would immunize employers that investigated such complaints and decided they were unfounded.

But the Court's decision doesn't mean the case is over, or that Staub gets the $58,000 the jury awarded him. At the trial, the jury was told an anti-military bias had to be a motivating factor in the firing -- rather than, as the Court in effect held, the motivating factor. The Seventh Circuit must now decide if the jury instruction is simply a case of "harmless error" -- or if Proctor Hospital is entitled to a new trial.

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]]>bias protectionemployee rightslawlegalproctor hospitalSCOTUSstaub v. proctorsupreme courtsupreme court rulingAbigail FieldTue, 01 Mar 2011 22:30:00 EST'Dirty Tricks' Lawyers Targeted in Ethics Complainthttp://www.dailyfinance.com/2011/02/25/dirty-tricks-lawyers-targeted-in-ethics-complaint/http://www.dailyfinance.com/2011/02/25/dirty-tricks-lawyers-targeted-in-ethics-complaint/http://www.dailyfinance.com/2011/02/25/dirty-tricks-lawyers-targeted-in-ethics-complaint/#commentsFiled under: , ,

StopTheChamber.com, a critic of the U.S. Chamber of Commerce and one of the targets of a planned Hunton & Williams dirty tricks campaign, is striking back.

The group has filed an ethics complaint with the D.C. Bar Association, reports the Blog of the Legal Times.

The complaint asks the Bar to revoke the law licenses of three Hunton & WIlliams (H&W) partners for ethics violations stemming from the alleged plot. Specifically, the complaint charges that:
"Attorneys John W. Woods, Richard L. Wyatt Jr., and Robert T. Quackenboss... counseled and assisted their client, the U.S. Chamber of Commerce, and their three private security contractor investigators, HBGary Inc, Palantir Technologies and Berico Technologies, to commit criminal and fraudulent conduct."
The complaint also outlines the criminal conduct committed and which planned to include:
Creating forged documents, Defamation, Cyber stalking, Spear phishing, Violation of privacy, Fraud, Extortion, Harassment, Destruction of property, Domestic spying, Scraping of computer data, Identity Theft, Cyber attacks, Interference with business, Civil rights violations, Conspiracy [list reformatted for space.]
The complaint notes that Woods -- whose bio identifies him as having some computer network security and electronic surveillance expertise -- had recently written an article labeling the relatively innocuous act of an attorney "friending" a witness, without disclosing why he wanted access to the witness's restricted information, as an ethical violation.

For their part, a Hunton & Williams spokeswoman says the "D.C. Bar proceedings are confidential and so we decline to comment." When asked about the plot and the emails that revealed it, the spokeswoman responded with a "no comment."

Plotting to Destroy Credibility

The complaint is rich with detail. Apparently the plotting on behalf of the Chamber of Commerce began in November. That's when H&W asked the three security firms already tasked with targeting Wikileaks (known as Team Themis) to target groups opposed to the Chamber. Later, Woods told the team it was their "'Iranian shipping' presentation that 'sold the Chamber'."

The proposed Chamber campaign would include planting false information at anti-Chamber organizations, getting those groups to publicize the bad information and then "outing" that information as false, all in an effort to destroy the groups' credibility.

Another proposal was to go after one of the groups, Velvet Revolution, using the following strategy:
"(1) "Attack [one of the VR principals] and after a series of attacks on his person start making ties to the back office folks ... discrediting them by association. Done in the right way this can cause them to distance themselves and also funders from [the principal]." (2) "Attack their antics as self-serving and childish." (3) "[c]reate some [false] information and get them to run with it."
The complaint lays out a dozen or so communications between the H&W partners and Team Themis, between "early November" and February 3, 2011, that make clear Themis was acting at the request and direction of H&W, and that H&W knew what the activities of Team Themis were.

Anonymous Hits Back

The plot was discovered by accident. On February 4, the CEO of one of the Team Themis firms told the Financial Times he had identified the leaders of Anonymous, a hacker collective that defends Wikileaks, and he warned they would be arrested. Anonymous quickly responded to that news, vigilante-style:
"within two days, Anonymous seized control of [the firm's] website, defaced its pages, extracted more than 70,000 company e-mails, deleted backup files, seized [the CEO's] Twitter account, and took down the founder's website rootkit.com. It then posted all those emails in a searchable form on the Internet."
And within those emails was information about the plot. Attorney Kevin Zeese, who filed the ethics complaint and serves on the board of one of the targeted groups commented on the plot's accidental discovery:
"Hopefully, it does not mean that these types of corporate cyber attacks and dirty tricks are widespread. I have heard from people in other movements, e.g. environmental, that they have faced these kinds of attacks...So, it may be a common tactic....This needs to be investigated and stopped as it is an attempt to prevent political action by citizens."
The FBI Notified

In a backhanded way, Zeese notes, the planned dirty tricks campaign was good news for his group, because "it shows we were being effective." And, he says, the planned campaign was not the first time H&W had targeted the group: "We know Hunton & WIlliams was active against us because when we published a press release on PR Newswire, they received a call from Hunton & Williams threatening them to the point where they refused to publish the release."

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StopTheChamber appears to have been the victim of an earlier dirty tricks effort. "We also received numerous death threats via email when our project took action," Zeese says. "We decided the best response was to let the FBI know and to do so publicly. As soon as we went public in our response the threats stopped. It was like a switch being turned off."

In addition to the ethics complaint, Zeese says, StopTheChamber.com has reported those other activities to the FBI and asked it to investigate. The group is also speaking with its attorneys about possible legal actions against all the players in the plot, not just H&W.

A Long, Grueling Process

Litigation takes a long time, and ethics complaints are no different. They can take years to process, and unlike litigation, it's all done behind closed doors. Unfortunately if any disciplinary action is taken, it may or may not be made public. So it'll be a long time before this plays out, and even when it ends, we may never know -- unless, of course, Zeese and his group succeed in getting the big law firm partners' law licenses revoked.

That would be huge news, and perhaps the final nail in the coffin of the old power structure, where money dictates power. Money will of course still be powerful, but if Anonymous's hack can lead to the disbarment of three big law attorneys -- or even criminal prosecution, if the FBI decides to investigate -- computer skills may indeed be proved supreme.

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]]>D.C. Bar Associiationdirty tricksethicsethics complaintsscandalstopthechamberU.S. chamber of commercewikileaksAbigail FieldFri, 25 Feb 2011 23:20:00 ESTInvestor Lawsuits Are Raising the Heat on Bank of America for 'Putbacks'http://www.dailyfinance.com/2011/02/24/bank-of-america-countrywide-mortgage-backed-securities-lawsuit-investors-putback/http://www.dailyfinance.com/2011/02/24/bank-of-america-countrywide-mortgage-backed-securities-lawsuit-investors-putback/http://www.dailyfinance.com/2011/02/24/bank-of-america-countrywide-mortgage-backed-securities-lawsuit-investors-putback/#commentsFiled under: , , , , , , ,

One of the straightest paths this country could take toward Bank Bailout 2, the Sequel, would be through forcing financial institutions to buy back the lousy mortgage-backed securities they sold before the meltdown. Large-scale buybacks could open gaping wounds on bank balance sheets, a risk Bank of America (BAC) is particularly vulnerable to because it swallowed Countrywide's gigantic -- and now infamously fraudulent -- mortgage machine. Regardless of that risk, banks should have to follow the rules of their contracts, and the law. But getting BofA to buy back its mortgage junk won't be easy.

As of June 30, 2010, BofA faced some $11 billion in requests for repurchase of such securities. Most of those requests came from government-sponsored entities such as Fannie Mae, from bond insurers, and from major investors. Less than a third of a percent -- $33 million -- were from so called "private label" buyers.

But those securities-holders are now beginning to make their demands, too. Investors in more than $1 billion of securities backed by 2006 vintage Countrywide mortgages have filed an unusual lawsuit to try to get many of those mortgages repurchased. That case, filed Wednesday in New York state court, is Walnut Place LLC v. Countrywide Home Loans Inc, and is one of the first investor putback efforts. Unsurprisingly, Bank of America told Reuters the suit was "meritless."

Investors Act Because Trustee Won't

Beyond the fact that the suit is one of the first investor attempts to force a large quantity of putbacks, it's unusual because the investors shouldn't have had to file it -- for two reasons. First, if the claims in the complaint are true, BofA is contractually required to buy back the mortgages. But also, Bank of New York Mellon, which is the trustee for the securities, is supposed to do the suing on the investors' behalf. BNYM's duty is to ensure the right mortgages are backing the securities. But it hasn't, so the investors have filed suit against BNYM as well as BofA, seeking to stand in BNYM's shoes and force the buy back.

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BNYM spokesman Kevin Heine had no comment on the suit, but if the allegations in the complaint are true, it's hard to see what grounds BNYM has to refuse to sue. Interestingly, the key allegations in this suit are unlikely to be the ones related to the mortgages, because the evidence that Countrywide loans generally weren't of the promised quality has already been shown to be quite strong.

No, the key will be demonstrating that the litigating investors had in fact crossed all the t's and dotted all the i's necessary to get the trustee to act. Unsurprisingly, plaintiffs attorney Leanne Wilson believes all procedural hurdles have been crossed, and that their case is strong. So I'm betting any explanation about why BNYM's not suing will key off of one of those procedural requirements. Either that, or BNYM will get off the couch and sue.

Trustees are generally loathe to act, because taking the wrong action could leave them open to suits from other investors. That said, it's hard to see why any investor would object to forcing BofA to buy back Countrywide's garbage mortgages. And it's not as if BNYM's taken no action requested by the investors. After the investors gave their evidence of contract violations to BNYM, the bank did ask BofA to buy the mortgages back. It was only when the issue reached the stage where it became clear that BofA would have to be compelled to honor the contract that BNYM balked.

Loans Weren't What Countrywide Claimed

As to the mortgages, all the loans in the $2.8 billion issuance were pay-option adjustable-rate mortgages, a type of loan that's performing particularly poorly. Option ARMs are notoriously shaky, because the pay-what-you-want feature meant most borrowers paid so little they didn't even cover the interest due, much less the principal, which meant that every month their loan debt grew instead of shrank. Worse, the borrowers faced payment resets that would suddenly jack up their payments.

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Of course, if Countrywide had complied with the terms of its contracts with investors, lousy performance wouldn't give the investors the right to sue. But as the SEC and multiple state attorneys general suits discovered, Countrywide routinely violated its official underwriting standards, and the investors' research indicates that this securitization was classic Countrywide in that regard.

The investors investigated about a third of the 6,500 mortgages backing the securities, and found that two-thirds of them appear to violate the contracts. The violations include mortgages that didn't meet Countrywide's official underwriting standards -- no surprise there -- and mortgages that were supposed to be on primary residences but weren't. The investors have evidence suggesting that the remaining, as yet unreviewed, mortgages would also have a high rate of problems.

BoA's potential liability depends on how many mortgages violate the securities contracts, as every put back is priced at the outstanding principal on the mortgage at that time, plus any unpaid but due interest. Wilson had no estimate of the stakes at this time.

The most common way Countrywide allegedly violated its contracts was by selling into securities mortgages in cases when borrowers had less than 5% equity in their houses. Borrowers with little equity are at especially high risk of default. The suit also alleges Countrywide relied on inflated appraisals and made loans that it knew wouldn't be repaid, as evidenced in part by loans that defaulted within the first few months of the mortgage.

One Suit Among Many
The plaintiff's firm in this case, Grais & Ellsworth, has filed many other mortgage-backed securities cases. Its clients include the federal home loan banks of San Francisco and Seattle, and Charles Schwab. The defendants include essentially all the big banks: BofA/Merrill Lynch/Countrywide, JPMorgan Chase/Bear Stearns, UBS, Credit Suisse, Deutsche Bank, Morgan Stanley, and a handful of smaller institutions. Those cases also allege securitized mortgages were not what was promised, however they are slightly different.

The putback case is a breach of contract claim; either the mortgages violated the terms of the contract or they didn't, and the contract specifies the remedy: buyback. The others are state securities law challenges, and involve proving the securities' selling documents were materially misleading, investors relied on the bad information, and were harmed by it. Nonetheless the suits involve similar methods of identifying bad mortgages and make similar claims about the mortgages' quality. Not one of the other cases has advanced very far yet. Some procedural rulings have been made, but no motions to dismiss have been ruled on, much less has discovery started.

Crawling to Toward Resolution

The buyback suit too is a long way from won, and at this stage, it's hard to tell how it will ultimately play out. But no matter the result, these cases are painful reminders that the whole financial crisis is really a slow-motion disaster. Yes, we had our speedy crash, our flash-frozen markets and our period of government bailouts. But several years on, the true damage isn't yet known.

The mortgage-backed securities lawsuits and the risk they represent to the financial system continue to crawl toward a resolution. Likewise, the multiple aspects of the foreclosure mess are only incrementally being clarified.

For those who wonder how long will it be before we have a clear perspective on the damage wrought by Wall Street's recklessness and regulators' inaction, the only answer is Yogi Berra's: It ain't over till it's over.



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]]>Bank of Americabank of new york melloncontractsCountrywide Financialdefaultfannie maefraudinvestorslawsuitmortgage meltdownmortgage-backed securitiesmortgagesoption armsputbacksrepurchaserobosigningsecSecurities and Exchange CommissionWalnut Place LLCAbigail FieldThu, 24 Feb 2011 16:30:00 EST