Entire Housing Market Based on FraudBy: David Dayen Wednesday October 13, 2010 11:44 am
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Felix Salmon has a new wrinkle on the housing scandal, detailing fraud perpetrated by the banks on investors in the selling of mortgage-backed securities:
http://blogs.reuters.com/felix-salmon/2010/10/13/the-enormous-mortgage-bond-scandal/ You should read the whole thing, but I’ll paraphrase, and connect it to the current scandal of foreclosure fraud, to which it links.
In the beginning, banks found a new bubble in housing for the Giant Pool of Money investors had to put into bonds and revenue-earning securities. The banks, which owned or otherwise had agreements with most of the major mortgage lenders and servicers, threw lending standards out the window and pushed borrowers into loans as fast as humanly possible. They had incomplete documentation and used faulty electronic trading systems and basically failed to transfer the notes into the mortgage pools that investors would purchase. And they knew full well that this information was incomplete.
The firm that did most of the third-party due diligence on mortgage pools for investment banks found consistently that at least half of their sample of the mortgages in the pool didn’t meet the underwriting standards of the loan originator. The banks would basically do nothing with that information but negotiate a lower cost for the mortgage pool from the originator. And despite knowing that the loans were faulty, they would not divulge any of this information to the investor, selling them knowingly bad product. Later, when the loans failed, the banks would seek more discounts from the originator for taking bad product. But the investors would get stuck, purchasing on bad information based on lies from the bank.
Felix says this has nothing to do with the foreclosure mess, but I believe it does.
Throughout this entire process, the banks neglected to follow the law on mortgage origination, securitization, and foreclosure operation, all in pretty much the same ways, to maximize their profits. In the origination phase they neglected underwriting standards, served up predatory loans and basically gave out loans to anyone with a pulse. In securitization they chopped up the loans in faulty ways that clouded the title, and didn’t transfer the notes properly. They took bad loans and knowingly passed them on to increase their profit margin. With this all crashed, they continued to neglect legal standards for foreclosure, increasing servicer fees while rushing everything through the system. In fact, they’re doing this to stay one step ahead of the origination and securitization fraud, which has revealed a lack of clear title in a substantial amount of mortgages in the United States.You can say this comes down to “sloppy paperwork,” but the investors will disagree with you. In fact, they’ll sue the banks for their misconduct. Because the biggest banks own the servicers, the trustees and basically everything else up and down the chain in this mess, the prospect certainly arises that they would require another bailout. As Yves says:
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More:
http://news.firedoglake.com/2010/10/13/entire-housing-market-based-on-fraud/:wow:
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