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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Criminal Prosecution

Reviewer of Subprime Loans Agrees to Aid Inquiry

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.

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The stupidest part of all of this is that allegedly professional experts were willing to promulgate the mythology behind the evaluation of debt risk based on what would be laughed at by anyone with a trained ear for motive behind how credit scoring products were sold to lenders.

Now they are more than willing to hide behind the myth of the so-called high-risk borrower as being the cause of this melt-down, but what they are conveniently ignoring is the system was created to deliberately depress scores to enable lenders to take advantage of the situation.

And the media is deliriously willing to blame the problem on borrowers who got hooked into sub-prime loans.  They don't want to address the fact that they wouln't have if the paid for credit scores were legitimate.

Any serious investigator needs to confront this system with the question: Why are the credit scores considered the word of God?

Hmmm...they're nothing more than an all-too convenient scheme to create more sub-prime borrowers and hang them with loans that can't survive.

So, to Jenny and Vikas, I would only say your analysis is superficial.



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While I would concur with Moose, I would also add that ALL empiracal studies I have ever seen show that the single most important factor in mortgage default loss frequency and loss severity is NET BORROWER EQUITY.  THis factor DWARFs ALL OTHER factors, including borrower credit, income, and various factors creating borrower economic stress, including unemployment, medical expenses, family breakup, etc.

The bottom line is that a strong borrower downpayment, A STRONG HONEST VALID APPRAISAL and a mortgage loan arrangement which amortizes principal are the elements creating reasonable loan safety. 
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