Lies of the Banks Coming Back to Haunt Them

by Neil Garfield

Now that Federal Reserve is nearly done buying the worthless mortgage bonds, the banks have shown that they are in fact making money hand over fist and the government is feeling less fearful about toppling the financial system with financial regulation.

Based upon my interview with a highly placed well-informed source who prefers to remain anonymous, it appears as though the playing field and the goal posts have been moved.

The starting point is the sale of worthless mortgage bonds to investors under false pretenses. It isn’t just that the underwriting standards that were to be applied to the mortgages were not followed; the problem is really that the money from the investors was never deposited into an account that was legally or even apparently owned by the investors or the asset pool shares that they thought they were buying.

The banks were claiming the investment shares (mortgage-backed securities) to be their own despite the clear money trail and paper trail showing that at no time were the investors informed that they were lending their money or their right to the mortgage loans to the banks and their co-venturers.

Then the banks claimed losses on those investment shares and collected from insurance, credit default swaps, other hedge products, and the taxpayers.

Then the banks claimed insolvency that threatened the entire financial system despite having received money from investors, part of which was never invested in anything related to mortgages or mortgage bonds. The threat of insolvency and the threat to the entire financial system was taken seriously by people in government that should have known better and perhaps did know better.

Then it was decided that the Federal Reserve would cure the insolvency issue by purchasing the worthless mortgage bonds at full value. They purchased it from the banks who it no time actually owned close bonds nor did the banks own any of the loans that supposedly “backed” the mortgage-backed bonds.

Then it was revealed that the banks were making a lot of money while the rest of the economy went into a nosedive. Any economist who is questioned on this subject will respond that it is very unlikely for intermediaries who act as conduits for transactions to make money when economic activity is on the decline.

If they are reporting profits it is from fictitious transactions. In this case fictitious transactions are “trading profits.” In reality the banks are feeding part of their ill-gotten gains back into the bank, and claiming it as profits. When the chips were down and the banks had to show that they were strong enough to exist at their mega size, they came up with the capital without any problem.

Now that they came up with the capital and the profits, they have demonstrated that the extra restrictions that regulators want to put on the banks will neither damage the bank’s profitability nor threaten the financial system.

But the Banks know that their ability to come up with money all stems from the fact that they lied to everyone and stole trillions of dollars and that it did not come from ordinary banking activities. SO they are currently in a bed they made for themselves: they don’t want the restrictions to be too restrictive because it might have a negative effect on their legal earnings, but they have proven the opposite with their illegal earnings --- which is precisely what the regulators were waiting for.

Hence the banks are stuck with whatever regulations are put on banks --- especially those who claim ownership over transactions in which they acted only as intermediaries --- or they must say that the regulations would be harmful because the truth is they didn’t really make the money that they reported as net income.

This doesn’t come as news to the Federal Reserve who knows that it is purchasing worthless bonds. But the Federal Reserve cannot say that the bonds are worthless because it would then be seen as quantitative easing which is inflationary. The whole reason the money supply was expanded so much without inflation going wild is that the Federal Reserve was merely “buying bonds” and not just giving out money. But the bonds were completely worthless. So the truth is that the Federal Reserve was and still is giving out money in quantitative easing.

This chain of events served to undercut the middle class portion of the economy completely, denuding them of jobs, houses and even prospects, creating blighted neighborhoods, declining tax revenues for municipalities and this bankruptcies like the City of Detroit. If the law was applied as it is applied to everyone except the big banks, then they would be charged with mortgage fraud, securities fraud (because the exemption does not apply if you don't follow the rules of issuance of a mortgage bond) and compensatory damages would be due to the following people with percentages of the total money advanced for each $1 of mortgage:

1. Investors: 125%
2. Insurers: 85%
3. Credit default swaps: 400%
4. Miscellaneous hedge products: 25%
5. Borrowers: 15% (100% of the payments and down payment)
6. Taxpayers: 5%
7. Federal reserve: 100%

Thus the situation was likened by my source to an old joke about lawyers, the punch line of which is that the dog screws everyone in the room and runs away with the steak.But the real problem is that by participating in this deceptive scheme, the Federal Reserve, put the burden of the loss on homeowners whose mortgages were paid in whole or in part by the financial sector including the Federal Reserve.

It isn’t just that the ownership of the loan has become completely convoluted; the real issue is money, to wit: the credit transaction with borrower has been long since extinguished by these devices used by the banks and the Federal Reserve, and vehicles like the Maiden Lane entities.

The amount of money owed on those mortgages is in reality far less than the the amount demanded by the banks --- which means that modification is possible for nearly every loan, whether delinquent or not, because the principal has already been reduced by payment. THIS IS WHY I SAY FOLLOW THE MONEY TRAIL BEFORE YOU FOLLOW THE PAPER TRAIL. THE PAPER TRAIL IS ONLY RELEVANT IF IT MATCHES THE MONEY TRAIL. OTHERWISE IT IS IRRELEVANT.

In the marketplace where loans are being refinanced and where mortgages are being foreclosed, these facts are carefully kept out of the mainstream conversation. But more and more judges are starting to ask questions because the behavior of the banks is just not consistent with a creditor who wants their money.

They seem to want the foreclosure judgment or sale but they are not so interested in the property. AND THAT is because the foreclosure puts the seal of approval from the state on a bunch of lies that were proffered to the courts and to the recording offices. It is the foreclosure judgment and sale that starts the clock ticking on wrongful foreclosures. Once time has run out on those actions, the banks are home free and the Federal Reserve, the unwitting or witting accomplice goes on their merry way while more than ten million families lose their homes, jobs and prospects.

If the Courts start finding that the mortgages are invalid, that their enforcement is defective or impossible, and that the debt is in doubt because there is no proof of the account receivable and the loss must belong to SOMEBODY, the current plan collapses. As I stated in 2007 based upon my own direct knowledge and the knowledge of industry sources who were active in the bundling, selling and trading activity associated with mortgage loans, the entire crisis would have been averted if the banks were held to account because the accounts due from the borrowers had been reduced without their knowing it just as the account due to the investors had been reduced without them knowing it.

This brings us back to what seems like a quaint solution now. I said we should forget blame and just let bring everyone to the table and share the losses and risks. People get to stay in their homes, the investors get a return on their investment, the banks earn fees, and companies like AIG won't be in danger of toppling. But then, the catastrophic shift in wealth inequality would also never have happened. And the super rich would have been revealed, if they were bankers, as common thieves with keys to the vault.

Boa desperate again

WHY ARE THE BANKS FIGHTING TO GET AS LITTLE AS POSSIBLE FROM EACH "FAILED" LOAN?

A drama is playing out in the state of Massachusetts. Bank of America is pretending to be the lender or the authorized servicer or both. But it outsourced the task of dealing with borrowers seeking modification. The company that was used is Urban Lending Solutions (ULS).  A deposition was taken from a knowledgeable source from within ULS.  The attorney  taking the deposition was merely looking for evidence of a script prepared by Bank of America that ULS employees were to follow. Not only was the script uncovered but considerable other evidence suggested institutional policies at Bank of America that were in direct conflict with the requirements of law, and in direct violation of the settlements with the Department of Justice and the banking regulators.

The transcript of the deposition was sealed at the request of Bank of America, which the borrower did not interpose any objection. Now there are a lot of people who want to see that deposition and who want to take the deposition of the same witness and other witnesses at ULS who might reveal the real intent of Bank of America. The question which is sought to be answered is why the mega banks are fighting so hard to take less money in a foreclosure sale then they would get in a modification or even a short sale. The policy is obvious. Borrowers are lured into a hole that gets deeper and deeper so that foreclosure seems inevitable and indefensible. Even after a successful trial modification the banks are turning down the permanent modification, as though they had the power to do so.

Now a number of attorneys are preparing motions to the trial court in Massachusetts to unseal the transcript of the ULS employee. Bank of America is opposing these efforts on the grounds of "confidentiality" which from my perspective makes absolutely no sense. Why would Bank of America share confidential information or trade secrets with a vendor whose only purpose was to interfere with the modification process? My opinion is that the only information that Bank of America wishes to keep secret is that the instructions they gave to ULS clearly show that Bank of America was not interested in anything other than achieving a foreclosure sale in as many cases as possible.

In nearly all cases the modification of the loan more than doubles the prospect of proceeds from the loan and in some cases approaches 100%. Thus the full-court press from the megabanks to go to foreclosure is a mystery that will be solved. My sources from inside the industry together with my own analysis indicates that the reason is very simple. The banks took in money from investors, insurers, counterparties in credit default swaps, the Federal Reserve, the Department of the Treasury and other parties based on the representation of the banks that (A) the banks owned the mortgage bonds and therefore on the loans and (B) there was a loss resulting from widespread defaults on mortgages. Under the terms of the various contracts within the false chain of securitization and the Master servicer had sole discretion as to whether or not the value of the mortgage bonds and the asset pools had declined and had sole discretion as to the amount of the loss caused by the defaults.

As a general rule of thumb, the banks computed value of the collateral at around 25% and therefore received payment to compensate the banks for a 75% loss. They received the payment several times over and then sold the mortgage bonds to the Federal Reserve for 100% of the face value of the bonds. It can be fairly estimated that they received no less than 250% of the principal amount due on each of the loans contained within the asset pool that had issued each mortgage bond. While they had to create the appearance of objectivity by showing a number of the loans as performing, they intentionally overestimated the number of loans that were in default or were in the process of going into default.

Let us not forget that while nobody was looking the Federal Reserve has been "purchasing" the worthless mortgage bonds at the rate of $85 billion per month for a long time and doesn't appear to have any intention of stopping that flow of money to banks that have already received more than 100% of the principal due on the notes. And lest you be confused, the money the banks received should have gone to the investors and should never have been by the banks.

Since the banks received 250% of the principal amount due on the loan, and actual recovery from the borrower of 100% on the loan would leave the banks with a liability to all of the third parties that paid the banks. The refund liability would obviously be 150% of the principal amount due on the loan and the banks would be required to turn over the hundred percent recovery from the borrower to the investors adding to their liability.

But if the case goes through a foreclosure sale, the banks can take a comfortable position that the number of defaults and the depth of the loss was as great as they represented when they took payment from insurers and other third parties. The liability of 250% is completely eliminated. Thus while it might appear to be in the bank's interest to take a 60% recovery from the borrower instead of a 25% recovery from a foreclosure sale, the liability that would be created each time alone was modified or settled would dwarf the apparent savings to the pretender lender or actual creditor.

The mere fact that they went to great lengths to seal the transcript indicates how vulnerable they feel.

PRACTICE MEMO TO FORECLOSURE DEFENSE LAWYERS

As a condition precedent I would suggest that in all cases where we feel the deposition transcript would be helpful I think it would create more credibility if you issued a subpoena duces tecum directed at Urban to produce the witness whose deposition was sealed in the existing case and to bring those records that were requested or demanded at that deposition. One of the questions that needs to be answered is whether the witness witness is still working for Urban, whether the witness has "disappeared", and whether his testimony has changed --- thus we would need the other deposition to test credibility and perhaps get exhibits that BANA either didn't object to, which means they waived confidentiality. If they do not move to quash the subpoena then they might also be arguably waiving the confidentiality objection.

If they do object, you have two bites of the apple --- if they move to quash they must state the grounds other than than it will damage their chances in litigation. The trial court would then hear the objections and of course each if the cases that could benefit from unsealing the deposition results in a hearing, then several judges would hear the same objection. The likelihood is that the objection would attempt to bootstrap the order sealing the deposition as reason enough to quash the subpoena. That in turn puts pressure on the Massachusetts judge to release the transcript.

The more Motions filed the better. So I would suggest that we reach out through media to get as many people as possible with separate motions saying that sealing the deposition is causing a disruption in due process. Since Urban reached out on behalf of BANA --- an allegation that should be made in opposition test the motion to quash the subpoena in each case --- exactly what confidential information needs to be protected? Has the Massachusetts court heard a motion in liming preventing the use of the deposition at trial? If not, then the objection is waived since the Plaintiff will clearly use the deposition at trial, if there is one.

The other issue is that BOA can't simply allege confidentiality rather than strategy in litigation. They must state with particularity what could be possibly confidential. There is no attorney-client privilege, there is no attorney work product privilege.  At first Bank of America disclaimed any knowledge or relationship with ULS.  When it became obvious that the relationship existed and that ULS was using Bank of America letterhead to communicate with borrowers they finally admitted that the relationship existed and then went one step further by alleging confidentiality and trade secrets so that the contract and instructions between Bank of America and ULS would never see the light of day., For a company that BOA disclaimed any knowledge but who used BOA stationery they were clearly an agent of BANA. What exactly could Urban have other than information about modification and foreclosure? I would also notice or subpoena BANA to produce the person who signed the contract with Urban and to bring the contract with him or her. Who received instructions from BOA? Where are those instructions? Were they produced at the sealed deposition.

 If the Massachusetts court does not unseal the transcript, doesn't this give BOA an opportunity for a do-over where they fabricate documents that are different from those produced in the sealed deposition?

What were the instructions to Urban? What was the goal of the relationship between BOA and URban? Where are the scripts now that we're produced in the sealed deposition?

Were the instructions to Urban the same as the instructions to all vendors assisting in the foreclosure process? Why did BOA even need Urban if it had proof of payment, proof of loss,  proof of ownership of the loan? We want to know what scripts were used by Urban and whether the same scripts were distributed to other vendors whose behavior could be plausibly denied. Discovery is a process by which the party seeking it must only show that it might lead to the discovery of admissible evidence. THE POINT MUST BE MADE THAT THE DEFENSE FOR WHICH WE ARE LOOKING FOR SUPPORT AND CORROBORATION IS THAT THE POLICY AND PRACTICE OF BOA WAS TO MOVE PEOPLE INTO DEFAULT BY TELLING THEM TO STOP MAKING PAYMENTS. WE WANT TO SHOW THAT THEIR GOAL WAS FORECLOSURE NOT MODIFICATION CONTRARY TO THE REQUIREMENTS UNDER HAMP AND HARP AND THAT RATHER THAN PROCESS MODIFICATION OR SETTLEMENTS THE POLICY WAS TO DERAIL AS MANY AS POSSIBLE TO GET THE FORECLOSURE EVEN IF IT MEANT THAT THE INVESTORS WOULD GET LESS MONEY? Why?

The instruction was to use the promise or carrot of modification to trick the homeowner into (a) acknowledging BOA as the right party (b) stop making payments causing an apparent default and causing an escrow shortage (c) thus assuring the foreclosure sale despite the fact that BOA never acquired and (d) thus assuring that claims against them from investors (see dozens of law suits against BOA) and from insurers and counter parties on credit default swaps and payments from co-obligors based on the "default" that BOA fabricated --- payments that involved more than the loan itself in multiples of the supposed loan balance.

This is an important battle. Let's win it. There is strength in numbers. We might find the scripts were prepared by someone who used scripts from other banks and that the banks were in agreement that despite the obligations under HAMP and HARP and despite their ,rinses in the AG and OCC settlement, their goal is to foreclose at all costs because if the general pattern of conduct is to settle these loans and make them "performing" loans again it is highly probable that for each dollar of principal that gets taken of the table there is a liability or claim for $10. This would establish that the requirements of HAMP and HARP has resulted in negotiating with the fox while the fox is in the henhouse getting fat.