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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Nye Lavalle
Loan Reviewer Aiding Inquiry Into Big Banks

By JENNY ANDERSON and VIKAS BAJAJ
Published: January 27, 2008
A company that analyzed the quality of thousands of home loans for investment banks has agreed to provide evidence to New York state prosecutors that the banks had detailed information about the risks posed by ill-fated subprime mortgages.

Investigators are looking at whether that information, which could have prevented the collapse of securities backed by those loans, was deliberately withheld from investors.

Clayton Holdings, a company based in Connecticut that vetted home loans for many investment banks, has agreed to provide important documents and the testimony of its officials to the New York attorney general, Andrew M. Cuomo, in exchange for immunity from civil and criminal prosecution in the state.

The agreement, which was confirmed by Mr. Cuomo’s office and Clayton, forwards an investigation by the attorney general into the question of whether the investment banks held back information they should have provided in the disclosures that accompanied the huge packages of loans they offered as securities.

In these disclosures, underwriters typically said that loans that did not meet even lowered lending standards, called exceptions, accounted for a “significant” or “substantial” portion of the loans contained in the securities, but they offered little hard, statistical information that Clayton promised prosecutors it would provide as evidence.

Investment rating firms like Moody’s and Fitch have said that they were deprived of this information before they gave the securities the top rating, triple-A.

Mr. Cuomo has not accused any investment house of a transgression, but he has identified the disclosures of exceptions to the lending standards as the main line of his investigation.

“At the heart of the subprime meltdown is the inability to get information,” said Howard Glaser, a mortgage industry consultant who used to work for Mr. Cuomo when he was secretary of housing and urban development.

About a quarter of all subprime mortgages are in default, which has resulted in billions of dollars in losses for buyers of securities backed by these mortgages. Many of these loans were made with low teaser rates that would later increase.

Critics of these practices say many of these mortgages should never have been made because borrowers could not repay them.

Investment banks, for their part, have said they provided adequate disclosures, and they even kept some of the securities on their books. They have taken more than $100 billion in write-downs as a result.

Mr. Cuomo has already obtained some evidence through subpoenas. But Clayton, which in industry terminology conducts due diligence for the investment banks, could help him identify salient details in its reports.

“The cooperation of compliance officers or due diligence firms is the best cooperation you can get,” said Tamar Frankel, a professor of securities law at Boston University.

In a statement on Saturday, Clayton’s chairman and chief executive, Frank P. Filipps, acknowledged the agreement and said, “We have complied with a subpoena to produce due diligence reports on various pools of loans that we had reviewed for clients and on loans that had exceptions to lenders/seller guidelines and were eventually purchased” by securities issuers. “This information that we provided to the attorney general is the same information that we provided to our clients.”

Without an immunity deal, officials at Clayton could have refused to testify under their right to protect themselves against self-incrimination.

There is no evidence that Clayton did anything wrong, but securing immunity provides legal certainty for the company and its officers. The company is in a difficult position, because its cooperation might hurt its clients, the investment banks.

Clayton, a publicly held company and the nation’s largest provider of mortgage due diligence services to investment banks, communicated daily with bankers putting together mortgage securities.

As part of the deal, Clayton has told the prosecutors that starting in 2005, it saw a significant deterioration of lending standards and a parallel jump in lending exceptions. In an another sign that the industry was becoming less careful, some investment banks directed Clayton to halve the sample of loans it evaluated in each portfolio, a person familiar with the investigation said.

The mortgage business boomed from 2002 to 2006, generating lucrative fees for mortgage brokers, lenders, credit rating firms, investment banks and many investors. Investment banks began buying billions of dollars of more risky loans made to borrowers with blemished, or subprime, credit histories and packaging them into securities that paid high interest.

Among the biggest investment banks in the mortgage business are Lehman Brothers, the Royal Bank of Scotland, Bear Stearns, Morgan Stanley and Merrill Lynch. None of them have been accused of wrongdoing in Mr. Cuomo’s investigation.

It is unclear how many lending exceptions are contained in the $1 trillion subprime mortgage market, but industry participants cite figures ranging from about 50 percent to 80 percent for some loan portfolios they examined.

The investigation is likely to hinge on whether the reports produced by Clayton included material information, which the issuers of securities must provide to investors under law. Securities fraud cases often turn on courts’ interpretation of materiality.

Investment banks hired companies like Clayton to evaluate a sample, say 20 percent, of the loans. The review was supposed to determine whether the loans complied with the law and met the lending standards that the mortgage companies said they were using. Loans that did not were classified as exceptions.

As demand for the loans surged, mortgage companies were in a strong enough position to stipulate that investment banks have Clayton and other consultants look at fewer loans. The lenders wanted the due diligence to find fewer exceptions, which were sold at a discount, the person familiar with the investigation said.

The investment banks then pooled the mortgages into securities, often by blending loans from different lenders. Information on those mixed pools was then delivered to the rating agencies, which assigned the securities a score. Pension funds and other big investors bought them because they had triple-A ratings.

But investment banks did not give the rating agencies their due diligence reports, and it appears that the agencies did not demand them, people familiar with Mr. Cuomo’s investigation said.

In January 2007, Clayton briefed at least one credit rating agency about the exception reports it was producing, the person involved in the agreement said, but the credit firm did not ask to see the reports.

Last week, the chief executive of Moody’s Investors Service pointed the finger at investment banks. The executive, Raymond W. McDaniel Jr., said in reference to the information the company received, “Both the completeness and veracity was deteriorating.”

Chris Atkins, a spokesman for Standard & Poor’s, said the firm was not responsible for verifying information provided to it by the issuers of securities. It is customary for rating agencies to accept the information they are provided by issuers of securities.

In November, Fitch Ratings published a detailed review of 45 loans in an effort to identify what went wrong as mortgages were turned into securities. It found extensive inaccuracies and fraud. The firm noted that many of the problems would have been easy to identify by looking at loan applications, appraisals and credit reports — but it appears that such review was either never done or ignored. Fitch now says that it will no longer rate subprime mortgage securities unless it is provided access to loan files.

The Clayton agreement is the latest development in Mr. Cuomo’s efforts to uncover abuses in the mortgage business. In November, he sued a subsidiary of First American, a real estate services company, accusing it of inflating appraisals in an effort to secure business from Washington Mutual, the nation’s largest thrift
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Blossom
http://calculatedrisk.blogspot.com/2008/01/mortgage-due-diligence-firm-granted.html

Long but good 'comments' read
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O -

I just posted this yesterday...Did you get it from this forum Nye?

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Apologies to George Bush fans but Ameriquest was well know for engaging in deceptive practices and writing so many bad loans is lowered the entire bond rating for the industry and 49 states attorney generals had found Ameriquest guilty of fraud.

The Presidents solution was to get Roland Arnall out of the country and make him ambassador to the Netherlands by rigging the vote in favor of him.

Had we been allowed to investigate and hold Roland Arnall accountable before he was effectively given diplomatic immunity we would have had more warning of the impending sub-prime crises which was beginning back then.

We have been telling people across the country inclusive of everyone from lenders to enforcement agencies, to investment firms to politicians and lawyers coast to coast.

There was plenty of information available for many years and we were stonewalled and denied justice on every level of the media, lending, investment, legislative, judicial and enforcement. The government from the county clerks to the White house and the financial services industry has been very well aware of rampant lending fraud.

Am I saying everyone knew and was a conspirator? no I'm saying people were informed at all levels and had to at least suspect something was wrong though when the borrower is telling you they made the payments on time or the loan was fraudulent to begin with and the lenders and supervisors are saying the loans are valid and you can look at the paperwork and see clear black and white evidence of fraud then there is a legal responsibility to investigate, likewise with the investors they received plenty of complaints and had many reasons to suspect something was wrong with double digit profits from single digit interest rates. Though the money trail is complicated someone in grade school has a clear understanding that you can't get more out of piggy bank than you put in.

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Blossom

JAKE ZAMANSKY'S BLOG

Sub-Prime Crisis and the Ratings Agencies

Sub-Prime Crisis and the Ratings Agencies

Back in August, Fortune ran a story that took the ratings agencies to task for their role in the subprime mortgage crisis. A noted investor named Jim Chanos, the head of Kynikos Associates, acknowledged he had a short position in Moody's stock: "If the rating agencies will downgrade only when we can all see the losses, then why do we need the rating agencies?"

If what I read in the Sunday Business Section is true about Attorney General Andrew Cuomo's investigation and the participation of Clayton Holdings, a company based in Connecticut that vetted home loans for many investment banks, then Mr. Chanos is due for a windfall (he's already at least more than doubled his money). Apparently Clayton Holdings has provided extensive documentation to the attorney general's office in exchange for immunity that shows investment banks allegedly knew many of the loans it was packaging for unwitting investors were more risky than was disclosed. Early on in the subprime crisis when I filed the first hedge fund investor arbitration claims against Bear Stearns, we made the similar allegations regarding the firm's failure to disclose risks.

More shocking is the allegation that the investment banks never turned Clayton's due diligence reports over to ratings agencies. Instead, according to the article, "in these disclosures, underwriters typically said that loans that did not meet even lowered lending standards, called exceptions, accounted for a "significant" or "substantial" portion of the loans contained in the securities, but they offered little hard, statistical information that Clayton promised prosecutors it would provide as evidence."

Wall Street's selective disclosure to the ratings agencies is only half the story. My question is, should the ratings agencies even need such information? I thought the ratings agencies did their own due diligence. If this story is accurate, what value-added are the ratings agencies providing if they aren't able to perform their own analysis?

Later on in The New York Times story, Raymond W. McDaniel Jr., the CEO of Moody's says of the investment bank's reports: "Both the completeness and veracity was deteriorating." My question to Mr. McDaniel is how could Moody's possibly award ratings to securities based on incomplete information?

Ordinarily we would just let market forces deal with such failure. However firms like Moody's, Standard & Poors, and Fitch are granted special competitive advantages because they are part of a select group of eight companies designated as Nationally Recognized Statistical Rating Organization (or "NRSRO"). Based on their record, the government should not be protecting them. If there was more competition the ratings might be more predictive and less expensive. Maybe if investors had gotten their hands on Clayton's reports they would have never invested in the first place.

The fact is ratings agencies have become lagging indicators. Mr. Chanos knows this better than anyone. He was an early short-seller of Enron after investigating the firm and finding accounting irregularities. It wasn't until mid-October of 2001 that three credit-rating agencies started to warn investors of Enron's deteriorating condition, and not until Nov. 28, just days before Enron filed for Chapter 11 bankruptcy protection, that they lowered their debt ratings below "investment grade."

If the only service ratings agencies provide is assigning some combination of the first four letters in the alphabet to a security, then maybe they can be replaced by a smart preschooler.

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This is pure gold Blossom!  Thanks for posting this excerpt from
the Z Man:
 
"Wall Street's selective disclosure to the ratings agencies is only
half the story. My question is, should the ratings agencies even need
such information? I thought the ratings agencies did their own due
diligence. If this story is accurate, what value-added are the ratings
agencies providing if they aren't able to perform their own analysis?"
 
MR
;^D 


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Digger

Monday, December 10, 2007

SEC, Spitzer: Swing and a Miss at Bear Stearns

Every year in New York around this time it's tradition that the ball gets dropped. The problem is this year it has nothing to do with New Year's Eve and Times Square. Today's Wall Street Journal revealed that the S.E.C. and former New York attorney general Elliot Spitzer dropped enforcement cases pertaining to whether Bear Stearns improperly valued mortgage backed securities and in doing so, harmed investors. The investigations would almost certainly have stemmed the tide of valuation inflation currently plaguing Wall Street and protected the myriad hedge funds, institutional investors and high net worth individuals who bought the poisonous debt. Translation: They Dropped the Ball.

Two cases in particular were investigated. In one case an SEC investigator went so far as to recommend a large civil enforcement penalty against Bear Stearns. In the other Bear Stearns allegedly sold bonds it priced at 90 cents on the dollar but after it unloading them, re-priced the value of the same bonds at 30 cents on the dollar before agreeing to purchase them back. Both cases were dropped and there was no comment as to why.

The dropped investigations highlight the rampant conflicts of interest and potential for fraud between Bear Stearns and its now collapsed internal hedge funds raised in the arbitration case we filed on behalf of the investors in the hedge funds. Claimants allege that Bear Stearns was moving toxic low quality collateralized debt obligations over to the fund at inflated market values. In essence, it's alleged that among other things, Bear Stearns was artificially creating a market for this debt by using dubious "mark to model" techniques and questionable transfers. Bear Stearns will eventually have to explain how it valued these transactions.

By the same token, the regulatory community must answer for why their leadership was asleep at the wheel. Poor leadership, in fact, is one reason Wall Street is in crisis to begin with. Bear Stearns execs reward the rank and file through end of the year performance bonuses and according to the Wall Street Journal story "traders long have had a motive to inflate the value of securities because their bonuses often are tied to them."

Without any downward pressure from regulators and a culture of greed/eat what you kill encouraged by Wall Street, is any wonder that things got so far out of control?
 
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