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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Investigations add to bank worries in mortgage crisis
By Carrie Johnson
THE WASHINGTON POST
12/28/2007

WASHINGTON — The nation's largest banks are losing billions of dollars from the mortgage debacle. But will pain from bad housing bets be compounded by government investigations?

As credit woes sparked by the troubled housing market threaten the broader economy, investigators are trying to determine whether investment banks bundled risky loans with good ones without properly disclosing the risk to investors.

Law enforcement officials including the Justice Department, the Securities and Exchange Commission and New York's attorney general are scrutinizing whether any banks and mortgage lenders helped fuel the crisis by misleading investors about dicey housing assets and then covered up losses when the markets turned sour. Government subpoenas are flying, investor lawsuits are mounting, and in the nastiest cases, businesses are pointing the finger of blame at one another.

The tangled system of bank regulation and the challenge of proving that executives intended to break the law when they unloaded bum assets could pose significant hurdles for investigators, current and former government officials say. Many of the assets that tumbled were explicitly marketed as involving borrowers with troubled credit histories — alerting investors that they were high-risk bets.


This complexity means investigators are searching for e-mails or witnesses to show that companies knew about the problems and failed to disclose them. Defense lawyers say without such witnesses or documents, proving cases will be difficult.

"Just because you have a business reversal doesn't mean there's a basis for a government investigation," said Robert J. Giuffra Jr., a New York securities defense lawyer. "The kinds of things we're talking about here turn on valuation judgments and market forces. This is not the stuff of a securities fraud case."

So far, the FBI and criminal prosecutors have focused on small-scale, localized housing swindles that involve phony paperwork and inflated valuations of a single home or group of properties. The U.S. Attorney in Miami recently filed charges against what he called a fraud ring of nearly three dozen brokers, sellers and appraisers who allegedly agreed to buy and sell homes at inflated prices. In California, a former broker pleaded guilty to accepting payoffs for approving questionable loans with phony paperwork.

The legal jeopardy of the market's biggest actors, however, remains unclear even as scrutiny of their activities has intensified.

The SEC, responsible for policing the stock market, is probing whether Merrill Lynch and a handful of others properly disclosed losses and financial problems in the weeks before its chief executive retired under pressure in October. A Merrill Lynch spokesman said the company is cooperating with the SEC probe.

Meanwhile, the U.S. attorney in Brooklyn is looking into last summer's precipitous collapse of two Bear Stearns investment funds, as well as whether former fund managers may have taken advantage of early warnings to transfer millions in their own money out of the accounts and into more stable investments.

Bear Stearns also has been sued by authorities in Massachusetts and by Barclays Bank, which slapped Bear Stearns with a civil fraud lawsuit recently for allegedly misrepresenting the health of a hedge fund and reassuring Barclays investors that all was well for "selfish" reasons in the months before the fund's June collapse.

Bear Sterns called the suit "unjustified and without merit." In a defense likely to be echoed by other financial institutions under scrutiny, Bear Stearns said its clients were sophisticated and made their own assessment after fully digesting the risks and rewards of such an investment without anticipating "what, in hindsight, turned out to be a historically difficult market."

The SEC has opened more than two dozen investigations into how companies are valuing their mortgage investments, whether businesses played down losses and whether executives may have sold stock when they knew that problems had emerged. Regulators underscored their concern this month by sending a letter to banks and insurance companies that, in essence, reminded them to be honest with investors about looming financial troubles.

Lawyers who have analyzed scandals involving savings and loans, stock option awards and arcane accounting issues say that businesses can shield themselves by arguing they relied on advice from accountants and lawyers. In some cases, the banks can claim they were victims of the same bad judgments that are hurting ordinary investors.

"This is one of those situations, kind of like the Internet bubble, where everybody and his brother guessed wrong," said Jonathan Dickey, whose firm defends companies, including Freddie Mac, against government investigations and investor lawsuits. "There are going to be very strong and powerful defenses that most of these firms are going to have."

Another open question, current and former regulators said, is how the U.S. Supreme Court will rule in a major securities lawsuit that could determine whether investors can sue third parties for their role in financial frauds. Industry groups are seeking to limit shareholders' power in such cases, which could bar the courthouse door to plaintiffs suing credit-rating agencies, investment banks and accountants and law firms that may have helped clients disguise housing-related losses. A ruling is expected by summer.

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New York probes Wall St. banks over subprime data: report

Sat Jan 12, 5:19 PM ET

NEW YORK (Reuters) - New York prosecutors are investigating whether Wall Street banks withheld information about the risks stemming from subprime loan-linked investments, The New York Times reported on Saturday.

Citing people with knowledge of the matter, the newspaper said the inquiry, begun last summer by state Attorney General Andrew Cuomo, was focusing on how banks bundled billions of dollars of exception loans and other subprime debt into complex mortgage investments.

Charges could be filed as soon as the coming weeks, the Times said. Connecticut Attorney General Richard Blumenthal told the newspaper he was also conducting a review and cooperating with New York officials.

The federal Securities and Exchange Commission is also investigating, the Times said.

Reports commissioned by Wall Street banks raised alerts about the high-risk loans, known as exceptions, which fell short of even the lax credit standards of subprime mortgage companies and the Wall Street firms, the newspaper said, but the banks failed to disclose those details to credit-rating agencies or investors.

The inquiries highlight Wall Street's leading role in igniting the mortgage boom that has imploded with a burst of defaults and foreclosures. The crisis is sending shock waves through the financial world, and several big banks are expected to disclose additional losses on mortgage-related investments when they report earnings next week.

EXCEPTION LOANS

Industry officials say the so-called exception loans make up anywhere from 25 percent to 80 percent of the $1 trillion subprime mortgage market among portfolios they had seen, the Times said.

The banks also failed to disclose how many exception loans were backing the securities they sold, with underwriters using such words as "significant" or "substantial," securities law requires banks to disclose all pertinent facts about securities they underwrite, the report said.

Blumenthal said the disclosures in the banks' securities filings appeared to be "overbroad, useless reminders of risks," the Times said.

"They can't be disregarded as a potential defense," the newspaper quoted him as saying. "But a company that knows in effect that the disclosure is deceptive or misleading can't be shielded from accountability under many circumstances."

New York state law would allow for criminal as well as civil charges, the Times said.

Cuomo declined to comment, but the Times said he had subpoenaed Wall Street banks including Lehman Brothers (LEH.N) and Deutsche Bank (DBKGn.DE), as well as major credit-rating companies Moody's Investors Service, Standard & Poor's and Fitch Ratings. Mortgage consultants including Clayton Holdings (CLAY.O) in Connecticut and the Bohan Group, based in San Francisco, were also subpoenaed.

Officials at Wall Street banks and the American Securitization Forum declined to comment, the Times said, while credit-rating firms would not say they had been subpoenaed, but that they were generally not provided due diligence reports even when they asked for them.

(Writing by Chris Michaud, editing by Patricia Zengerle)


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