Mortgage Servicing Fraud
occurs post loan origination when mortgage servicers use false statements and book-keeping entries, fabricated assignments, forged signatures and utter counterfeit intangible Notes to take a homeowner's property and equity.
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Ambac: Deteriorating Bonds Could Be A Sign Of Fraud

By Lavonne Kuykendall


CHICAGO -(Dow Jones)- Bond insurer Ambac Financial Group Inc. (ABK) has hired outside legal and forensic experts to examine 17 of its financial guarantee transactions and may seek to cancel the contracts if the experts uncover evidence of fraud, David Wallis, Ambac's chief risk officer, said Wednesday.

He singled out two specific transactions as examples of the type of transaction that is under scrutiny and said the company was taking a two-pronged approach to examining transactions that have performed much worse than expected.

One way, "difficult and time-consuming," is going through the securities loan by loan, which Wallis said the company is doing.

The second "grander theory" approach is "not loan by loan, but a more grand scale fraudulent inducement."

One transaction that has performed below expectations is a deal with Bear Stearns Co. (BSC) that closed in April 2007.

On its Web site, Ambac lists three Bear deals under the 2007-1 name, with a total net par exposure of $790.6 million in second mortgages and home equity lines of credit as of the end of March. Originally, all three were rated A+ but are all considered below investment grade now, Ambac said.

Another deal, with First Franklin, a unit of Merrill Lynch (MER), has a current net par exposure of $396.95 million and a below-investment-grade internal rating, down from A+.

Ambac originally projected that losses on the underlying collateral of the Bear Stearns transaction would be between 10% and 12%, but now expects losses of 81.8% of underlying collateral, a transaction that has seen an unexpectedly " rapid escalation of losses."

These two deals represent an outsized percentage of the insurer's $940 million credit impairment, Wallis said.

Presumably, if the deals are invalid, those impairments could be reversed, though Wallis did not discus financial implications.

Some of the factors the company will examine include loan-level document review and a review of legal documents "focusing on representations and warranties," Wallis said. "Hypotheses are being built which involve fraudulent activity in various guises."

"If they can demonstrate there was fraud, they don't pay" is the general legal standard for such contracts, Gregory Hindy, a partner with Newark law firm McCarter & English LLP told Dow Jones Newswires Wednesday.

Hindy said that such lawsuits in the bond insurance industry are rare but that he expects to see more of them in coming months.

To get out of a contract, the insurer would have to make the case that "had these been accurately described," the insurer would not have entered the contract.

In recent months, Security Capital Assurance (SCA) has sought to cancel seven financial guaranty contracts it wrote for Merrill Lynch, and FGIC Corp. sued to cancel $1.7 billion in financial guarantee contracts it wrote for IKB Deutsche Industriebank (IKB.XE) of Dusseldorf, Germany.

During its first-quarter conference call last week, investment bank Merrill Lynch said it had canceled $1.1 billion in contracts with MBIA Corp. (MBI) and was working to resolve its conflict with Security Capital Assurance.

Ambac's share price fell Wednesday as the company reported a net loss of $1.66 billion, or $11.69 a share, compared with year-earlier net income of $213.3 million, or $2.02 a share.

Shares of Ambac recently traded down $2.83, or 46.9%, to $3.20, MBIA traded down $4.39, or 33%, to $8.89, Security Capital Assurance traded down 16.2% to 83 cents and Assured Guaranty Ltd. (AGO) traded down 1.4% to $25.25.

-By Lavonne Kuykendall, Dow Jones Newswires; 312-750-4141; lavonne.kuykendall@

Hey Bond insurers........pssst.......look at the servicing......MORTGAGE SERVICING FRAUD !  Hello ~

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They got caught with their pants down.



I repeat.


Bond Insurers Led Into Temptation
Rich White, Investopedia 02.28.08, 11:45 AM ET

Municipal bond insurance got its start as a way to protect investors if their bond issuer defaulted. But as the industry matured, bond insurers tried to generate new revenue by underwriting sometimes exotic structured finance products.

Early History--It's a Long Walk to Alaska

In 1971, MGIC Investment (nyse: MTG - news - people ) of Milwaukee formed a subsidiary called American Municipal Bond Assurance (nyse: ABK - news - people ) expressly for the purpose of providing financial guaranties to municipal bond investor. That same year, the first municipal bond was insured by Ambac to build hospital facilities for the town of Greater Juneau, Alaska.

The location dramatized an important benefit of this new type of insurance; after all, how many investors have ever visited Juneau? More importantly, how many would want to travel so far to perform due diligence on municipal hospital facilities? (To learn more, see "Due Diligence In 10 Easy Steps.")

Once Ambac attached its insurance guarantee to the bonds, long expeditions became less necessary. The insurance was purchased by the bond issuer (Greater Juneau) when the bonds were issued, and it continued as long as any bonds in the issue remained outstanding. If any insured bonds should ever default on principal or interest payments, Ambac guaranteed to make up any defaulted or late payments to the investor. In effect, the high credit rating of Ambac (which was "AA" from S&P in 1971) trumped the credit rating of the bond issuer. Once investors became satisfied that Ambac was a high-quality insurance company, they didn't have to worry as much about the due diligence on municipal bonds issued in Juneau, Laredo or Anytown, U.S.A.

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The invention of municipal bond insurance revolutionized the public debt markets over the next 36 years. In 1974, another new insurance company entered the market, the Municipal Bond Insurance Association (nyse: MBI), and gained the highest possible rating, " AAA." In 1979, Ambac also achieved this rating. By 1988, 25% of all newly issued municipals carried insurance. In 1994, bond insurance helped to avert panic in the municipal market, when Orange County, California, declared bankruptcy. (For more on the corporate debt rating system, see "What Is A Corporate Credit Rating?")

The U.S. municipal bond market grew steadily over several decades to about $2.6 trillion in value as of year-end 2007, according to the Securities Industry and Financial Markets Association (SIFMA). The market is subdivided into two types of bonds: General obligation (GO) bonds are backed by the issuer's full credit and taxing ability, and are commonly issued by states, counties and municipalities.

Revenue bonds are backed by specific revenue streams from license fees, tolls, rents or special purpose tax assessments.

GO bonds are generally considered to be of higher quality, because the bond issuer has taxing power and can increase taxes to repay bonds, if necessary. For example, most states in the U.S. command either "AAA" or "AA" ratings, which indicates very high quality, even without bond insurance. The issuers of revenue bonds, however, tend to be smaller and lack discretionary taxing power, so their ratings are more varied and often lower. About two-thirds of all new municipal bonds issued are revenue bonds, according to the SIFMA. (To learn about investing in muni bonds, see " The Basics Of Municipal Bonds" and " Avoiding Tricky Tax Issues On Municipal Bonds.")

Building Investor Confidence

By paying a premium to a municipal bond insurer at the time a bond is issued, GO and revenue bond issuers have been able to "enhance" the issue's credit quality to the highest "AAA" level. This increases investor demand for the bonds in both the initial underwriting process and secondary trading market.

Historically, the leading bond insurers have pursued two other strategies that helped to increase investors' confidence in their guarantees.

-- Narrow focus--While many insurance companies pursue a variety of business lines (e.g., life, auto, health and homeowner's insurance), companies like Ambac and MBIA (nyse: MBE - news - people ) "stuck to the knitting." For this reason, these companies are often called monolines. The narrow focus helped them avoid exposure to huge losses that have hurt other insurers, such as the vast property damage caused by Hurricane Katrina.

-- Zero-loss standard--The monolines have always emphasized that they conduct rigorous credit analysis of every bond issuer to maintain a "zero-loss" underwriting standard. In other words, they claimed to have confirmed that the insurance would not be necessary except in very extreme cases.

For a quarter of a century, the narrow focus and zero-loss standard worked for the monolines according to plan. For example, during the first half of 2007, $231 billion in long-term municipal bonds were issued in the U.S., according to the SIFMA. Within this issuance, roughly 48% of the nominal dollar volume had credit enhancement. About 90% of the enhancements were through monoline insurance, as opposed to other methods such as bank letters of credit or standby purchase agreements.

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Meanwhile, default rates on municipal bonds were very low, averaging just 0.63% on a cumulative basis for all bonds issued between 1987 and 1994, according to a long-term study by Fitch Ratings.

In this environment, the municipal bond insurance industry flourished. MBIA and Ambac grew their annual revenues to $2.7 billion and $1.8 billion, respectively, and they were joined in the field by others including FGIC, XL Capital Assurance (nyse: XL - news - people ) and ACA Capital Holdings (nyse: ACA - news - people ).

In a search for increased profit, the monolines began to diversify their book of business into the lucrative world of residential mortgage-backed securities (RMBS) and other structured finance products. The RMBS products included both high-quality "prime" mortgages and lower-quality subprime mortgages. In the structured credit product line, monolines guaranteed the principal and interest on exotic CDOs ( collateralized debt obligations) that sliced and diced different cash flows of RMBS, all of which were heavily leveraged to a continuation of the U.S. housing boom that persisted from 2002 until 2006.

Then in 2006, the housing boom went bust. The RMBS and CDO guarantees of the monolines became costly liabilities, and the credibility of their zero-loss standard went out the window, perhaps forever. (To learn more, see "Why Housing Market Bubbles Pop.")

In late 2007 and early 2008, the tide began to turn against the monolines in three ways:

--Standard & Poor's downgraded the credit rating of ACA Capital Holdings by 12 levels, to "CCC" (highest risk). This downgrade came after ACA reported a $1 billion loss.

--Fitch Ratings reduced the prized "AAA" rating of Ambac to "AA," while also putting the company on "negative watch," indicating the potential for further downgrades.

--MBIA was forced to scramble for additional capital to shore up its losses, which were reported as $1.9 billion for 2007 amid heavy balance sheet write-downs. (To read about other subprime casualties, see "The Rise And Demise Of New Century Financial" and "Dissecting The Bear Stearns Hedge Fund Collapse.")

Although the monolines did maintain their narrow focus on insuring credit risks, their foray into RMBS and CDOs proved costly to their stature as strong guarantors. The question then remains: What should municipal bond investors know, and do, about this type of insurance going forward?

--Insurance is only as good as the rating and credit underwriting policies of the monolines that stand behind it. It's important for investors to evaluate not only the quality of the underlying bond, but also that of the insurer.

--It may take some time for the monolines to shake out the mess from the worst housing market in decades.

--Perhaps most importantly, diversification can be just as valuable in municipal investing as in other areas. That means spreading risk among different issuers and regions of the country. A number of tax-exempt mutual funds offer diversified portfolios of municipal bonds, and one significant event of 2007 was the proliferation of exchange-traded funds (ETFs) that specialize in municipals.

Consider insurance as just another feature attached to a municipal bond--not an excuse to preclude further due diligence. The bond insurers gambled their reputations on exotic new products--but you don't have to do the same with your nest egg.

This article is from, the Web' s largest site dedicated to financial education. Click here for more educational articles from Investopedia.
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Put lipstick on this pig.

WE KNOW WHO IS BEHIIND IT... It's still GE, er, a pig, period.

Gerald L. Friedman

Gerald L. Friedman has been a recognized leader and innovator in the financial guaranty business for more than 30 years. He has pioneered new products and developments in private mortgage insurance and was one of the creators of the concept of municipal bond insurance.

FM Watch (1999 - 2003)
Mr. Friedman served as the founding chairman of FM Watch, the predecessor of FM Policy Focus, a watchdog group that works with consumer and taxpayer groups, affordable housing advocates and financial institutions dedicated to ensuring that Fannie Mae and Freddie Mac, two Government-Sponsored Enterprises (GSEs) keep the interests of homebuyers and taxpayers above the interests of their investors.

From 1993 to 1999, Mr. Friedman was the chairman and chief executive officer of Amerin Guaranty Corporation and its parent, Amerin Corporation. He created a new, more efficient, and more profitable use of mortgage insurance in 1993 with the founding of Amerin Guaranty Corporation. Backed by a $200 million capital commitment from an investor group made up of Aetna, AT&T Investments, General Motors Corporation, J.P. Morgan and Morgan Stanley, Amerin provided mortgage insurance to most of the nation's largest lenders.

In November 1995, Amerin went public with an initial public offering that raised $154.1 million in capital. Headquartered in Chicago, Amerin was listed on NASDAQ under the symbol "AMRN." In November 1998, Amerin, which had grown to nearly $500 million in assets, announced an agreement to merge with CMAC Investment Corporation to form Radian, the nation's second largest mortgage insurer. The merger was completed in June of 1999.

Mr. Friedman's well-known and chronicled career in the financial guaranty business began in 1961 when he joined Mortgage Guaranty Investment Corporation (MGIC) in Milwaukee, Wisconsin, remaining there until 1981. He eventually became the organization's president and chief operating officer. Along the way, he played a significant role in the development and management of MGIC's mortgage insurance and mortgage-backed securities.

In 1971, Mr. Friedman founded the first bond insurer, AMBAC, an MGIC subsidiary. The first bond issue ever insured was a $600,000 Greater Juneau Borough, Alaska, general obligation issue. In 1998, of the $286 billion of bonds issued, $145 billion, or 51 percent, were insured. In 1983, Mr. Friedman founded Financial Guaranty Insurance Company (FGIC) with $85 million of capital, and a total capital commitment of $400 million. The shareholders were General Electric Capital, General Reinsurance, J.P. Morgan, Kemper Investments, Lehman Brothers and Merrill Lynch. FGIC was sold to GE Capital Corporation for more than $1 billion in 1989, and continues to be a leader in the financial guaranty industry.


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What's going on at Ambac?

The monoline insurer brought out its Q1 results yesterday, revealing a $1.7 billion writedown on its CDO portfolio. But there's worse news than that.

We've covered the problems at Ambac and its fellow monolines before -
Crisis point
Monolines show no appetite for Buffett
US regulators reveal plan to split monolines
Dragged down

Ambac's also made a $1 billion loss provision for its exposure to mortgage-backed securities, and there are now suggestions again that it could lose its vital AAA credit rating. Shares are down 45%. MBIA's fallen almost as far, and it seems to have doomed SCA's latest attempt to get its share price back above the $1 mark.

And there's yet more. According to the conference call yesterday, Ambac's now investigating several of its deals, looking for - well, it's not quite clear, but it sounds like they're looking for fraud, and it sounds like they're starting to find it.
Transcript (via Calculated Risk):

David Wallis, Chief Risk Officer: is very striking how concentrated, how very concentrated, some of the poor performers are, and that gives rise to all sorts of obvious questions.

I mentioned that we have diagnostic and forensic people working on some of these deals. We are beginning to see stuff back from that. The diagnostic is basically running tapes looking at delinquencies and trying to figure out given what you now know and what you knew then, would you have expected that delinquency or not? And if the answer is not, well, that is interesting.

So, in other words, you have an incredibly low FICO within a pool, and it is delinquent. Well, maybe you expected that. But if it is incredibly high and the LTV was incredibly low, then maybe you would not expect that.

So then what you do is, you take an adverse sample, so you run the tape through a program, take an adverse sample, i.e. looking for the suspicious ones, and then what you do is you go look at the files. That is a very difficult long process, but you look in the files. You look at the transcripts of servicing records, and you see what you see. And all I will say is that there is some pretty amazing stuff to see.

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FBI is still investigating the municipal bonds from its raids from a year ago in November, Don't count on anything soon, but CBASS has new trouble coming! As well as MGIC/RADIAN from the class action filed against Radian and CBASS, Guess who "Foreclosed" on a number of the properties, Litton Loan!   Its trouble for Goldman Sachs down the road. Over 900 million in debt, could jump to Billions very soon. 

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Steve writes:
If anyone wants details on the Bear Stearns ALT-A 2007-1 pig under discussion, the CIK to look it up on Edgar is 0001385474.

A large portion of these loans are I/O. A big chunk were originated by
...drum roll...Countrywide.
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Wednesday, May 7, 2008

The Credit Default Swap Scam Exposed!

Looks like the monoline bond insurer AMBAC's troubles are continuing.  I guess they should have not gone into the collateralized debt obligation (CDO) guarantee business after all.  The pioneer in municipal bond insurance only insured 1% of municipal bonds in the first quarter, WTF?  Who is insuring all those "risky" municipal bonds?  "Financial Security Assurance Inc." captured 65% of the municipal bond insurance market.  FSA has stable financial outlook on its AAA ratings from all three major credit rating companies.  How can a monoline bond insurer that insures CDOs (by selling Credit Default Swaps) have  a such a good financial outlook these days you ask? 


They insure a lot of the commercial paper sold by Dexia Asset Mangement.  These CDOs have not had as many defaults as other derivatives.  Must be good management right?  Hardly, Dexia is a horribly corrupt Belgium bank with a history of fraud charges, I like to call them Banksterz. 

Oh and BTW  "Financial Security Assurance Inc." is a subsidiary of  Dexia SA.

So let me get this right, Dexia a corrupt bank,  makes loans then packages those loans into CDOs which it sells through Dexia Asset Mangement, to it's customers which are municipalities.  Those CDOs are insured by Financial Security Assurance Inc., which is also owned by Dexia.  Isn't $hit like this illegal? 


No, because there are almost no regulations on the derivates market.

Dexia makes loans to individuals and municipalities.

Dexia takes those loans and creates CDOs.

Dexia insures those CDO's with it's CDS (Credit Default Swaps)

Dexia then sells the CDO's that is creates, and insures, to their customers, which happen to be municipalities.

I wonder if they sell CDOs that they have insured to municipalities, that contain loans from that municipality?  If you don't make your loan payment, your derivative looses value, so you don't get the revenue from your CDO to make your loan payment which in turn causes you to default on your own bonds which lowers your credit rating , which makes your loan payments go up.  Talk about an incentive not to default on a loan if you are the municipality! 

Now Dexia is taking over the municipal bond insurance market, which btw is a bull$hit market because municipal bonds are not that risky and there is pressure in congress to change the way they are insured.  City and state officials also have begun to question the value of bond insurance. California Treasurer Bill Lockyer is circulating a petition to require credit rating companies to change how they assess municipalities. The current rating system exaggerates the risk cities and states will default, creating artificial demand for bond insurance.  U.S. Representative Barney Frank, a Massachusetts Democrat, told Moody's it had a month to change the way it rates municipal bonds or face legislative intervention.


The monoline bond insurers  go broke because of their Credit Default Swap business insuring CDOs.

The monoline bond insurers cannot make the payments to cover the defaults.

Municipalities which own CDOs, default on their bonds because of the loss of revenue from failed CDOs.

Municipal bonds ratings get downgraded and now considered "risky".

The monocline bond insurers get gobbled up by the Banksterz.

The Banksterz have now "saved the day" and in return they tell Barney Frank to phucque off.

And you thought the "Credit Crisis" was caused by poor people not paying their mortgage…

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