Wow, someone in DC has connected the dots: that the banks’ failure to adhere to contractual and legal requirements in the residential mortgage backed securities market are so extensive and widespread as to constitute systemic risk. Alan Grayson, Congressman from Ground Zero of the foreclosure mess, is calling on the Financial Stability Oversight Council to investigate the escalating foreclosure fraud crisis.
Although the data points we have seen so far could be considered anecdotal, we have evidence that strongly suggests that major RMBS originators, the investment bank packagers, and the bank trustees failed to convey the notes (the borrower IOU, which is critical to having the legal standing to foreclose in 45 states) to the RMBS trusts starting in 2005, perhaps even earlier. And comments from industry insiders suggest this problem is pervasive.
That puts a cloud over the entire US RMBS market, the biggest asset class in the world. This paper was sold as secured; the ability to offset the cost of borrower defaults by seizing and selling his house is critical to the value of the instruments. And if no assets were conveyed to a particular trust by closing, an even uglier possibility exists: under New York law, which was elected by RMBS as governing law for the trust, it would be considered to be “unfunded”, which means it does not exist. read on
October 7, 2010
Dear Secretary Geithner and members of the Financial Stability Oversight Council (FSOC),
The FSOC is tasked with ensuring the financial stability of the United States, which includes identifying and addressing possible systemic risks. There is a well-documented wave of foreclosure fraud sweeping the country that presents such a risk. Bank of America and JP Morgan Chase have both suspended foreclosures in 23 states where that fraud could be uncovered and stopped by the courts. Connecticut has suspended foreclosures.
I write to encourage the FSOC to appoint an emergency task force on foreclosure fraud as a potential systemic risk. I am also writing to ask the members of the FSOC to use their regulatory authority to impose a foreclosure moratorium on all mortgages originated and securitized between 2005-2008, until this task force is able to understand and mitigate the systemic risk posed by the foreclosure fraud crisis.
So far, banks are claiming that the many forged documents uncovered by courts and attorneys represent a simple ‘technical problem’ with foreclosure processes. This is not true. What is happening is fraud to cover up fraud.
The mortgage lending boom saw the proliferation of predatory lending and mortgage fraud, what the FBI called at the time ‘an epidemic of mortgage fraud.’ Much of this was lender-induced.
When lenders – many of whom are now out of business – originally lent money to borrowers, they often did so knowing that the terms of the loans could not possibly be honored. They sought fees, not repayment. These lenders put people in predatory loans, they induced massive amounts of fraud, and Wall Street banks misrepresented these loans to investors when they moved through the securitization chain. They were stealing money from investors, and from homeowners.
Obviously these originators and servicers didn’t keep good records of who owed what to whom because the point was never about getting paid back, it was about moving as much loan volume as possible as quickly and as cheaply as possible. The banks didn’t keep good records, and there is good reason to believe in many if not virtually all cases during this period, failed to transfer the notes, which is the borrower IOUs in accordance with the requirements of their own pooling and servicing agreements. As a result, the notes may be put out of eligibility for the trust under New York law, which governs these securitizations. Potential cures for the note may, according to certain legal experts, be contrary to IRS rules governing REMICs. As a result, loan servicers and trusts simply lack standing to foreclose. The remedy has been foreclosure fraud, including the widespread fabrication of documents.
There are now trillions of dollars of securitizations of these loans in the hands of investors. The trusts holding these loans are in a legal gray area, as the mortgage titles were never officially transferred to the trusts. The result of this is foreclosure fraud on a massive scale, including foreclosures on people without mortgages or who are on time with their payments.
The liability here for the major banks is potentially enormous, and can lead to a systemic risk. Fortunately, the Dodd-Frank financial reform legislation includes a resolution process for these banks. More importantly, these foreclosures are devastating neighborhoods, families, and cities all over the country. Each foreclosure costs tens of thousands of dollars to a municipality, lowers property values, and makes bank failures more likely.
I appreciate your willingness to assess possible systemic risks to the country, and would again encourage you to suspend foreclosures until this problem is understood and its ramifications dealt with.