Did Servicers Commit Fraud So Banksters Could Get Big Bonuses?

When I asked yesterday about the relationship between the stress tests and the servicers’ foreclosure fraud, I had a hunch that the banksters might have been committing that fraud so as to be able to show financial viability so as to be able to repay TARP funds so as to escape the oversight of the government. I wondered whether the stress tests were not just a means by which the government should have exercised some control over the servicers that they already knew to be having problems, but were also one reason the servicers were pushing for the most profitable outcomes (including choosing to foreclose rather than modify loans).

Rortybomb, who knows a lot more about how this stuff worked than I do, provides these damning details:

For what it is worth, I’m sure those conducting the stress test knew that this conflict existed and knew that it was very profitable to the banks. Servicing is considered a “hedge”, because as the origination business dries up foreclosures will increase and servicing income would go up, something Countrywide and others loved to talk about.

Let’s go to a Countrywide Earnings call from Q3 2007:

Now, we are frequently asked what the impact on our servicing costs and earnings will be from increased delinquencies and lost mitigation efforts, and what happens to costs. And what we point out is, as I will now, is that increased operating expenses in times like this tend to be fully offset by increases in ancillary income in our servicing operation, greater fee income from items like late charges, and importantly from in-sourced vendor functions that represent part of our diversification strategy, a counter-cyclical diversification strategy such as our businesses involved in foreclosure trustee and default title services and property inspection services.

The servicing operation will “fully offset” lost income from increased delinquencies and lack of origination business. This is by design. It’s tough to find good counter-cyclical strategies, but this appears to be one. If you were both TBTF and really in need of cash, could you squeeze this a bit further, say by violating the rule of law?


Someone enterprising on the hill could ask how the servicing income was incorporated into the stress test and how predictive it was in the adverse scenario case. Things like this make it even more important that the government takes a strong hand in rooting out foreclosure fraud.  We cannot allow an impression to form that we collectively looked the other way at issues of foreclosure abuse, issues well documented since before the stress test, because this business line is one of the few profitable things available to TBTF firms.  TBTF firms that needed cash, were (and are) backstopped by taxpayers and wanted to get out of TARP to issue bonuses.   Nobody gets to be above the law, regardless of how systemically important they are or whatever numbers needed to be hit on the stress test.

In other words, going back to 2007, mortgage companies were upfront in claiming that their servicer-related profits served to offset their loan losses. That’s not to say they would have argued that in their stress test results (again, I’m not expert on this, but I’m not even sure that the stress tests looked at the servicer income). But it does say that to prove viability–to make a half-credible claim they weren’t insolvent and to evade restrictions on bonuses and political giving–they had an incentive to suggest their servicer income was enough to offset a significant chunk of their loan losses. That not only gave them a huge incentive to keep servicer costs low (by doing things like hiring WalMart greeters and hair stylists to serve as robo-signers), but it also increased the incentive to increase profits as a servicer by refusing to modify loans.

So I’d go further than Rortybomb in calling for some enterprising Hill person to look into this. Given that we know Timmeh Geither, campaigner against injustice, was officially warned and knew about this conflict, I’d like to know how much he knew about this hedge. The Administration now says it was helpless to stop this kind of fraud, yet it chose not to use at least two sources of leverage (cramdown and stress tests) to control it. Is that because they knew the servicer fraud was an important part of extend anad pretend?

  1. phred says:

    Timmeh is going to hit the circuit hard following up his stellar performance with Charlie Rose to keep selling his alternative universe narrative. Lets briefly revisit Rortybomb’s statement:

    For what it is worth, I’m sure those conducting the stress test knew that this conflict existed and knew that it was very profitable to the banks.

    Timmeh covered up fraud before (with his performance art stress tests) and his is covering it up now with his noble defense against injustice.

    Timmeh should be fired. And in my own alternate universe prosecuted. I’ll settle for fired, though.

  2. Gitcheegumee says:

    I’d like to join in with Bob, and thank you for your attention to this issue.

    A particular thanks for the link to the amazing article about the depos of robosigners.((by doing things like hiring WalMart greeters and hair stylists to serve as robo-signers).

    An amazing piece–and why am I not surprised that one of the servicers named in the article, Litton Loan Services-is a division of Goldman Sachs?

  3. timbo says:

    Notice that neither candidate in the California Gubernatorial debate last night mentioned foreclosures…? I mean, you’d think that the foreclosure crisis in California was creating jobs or something…

  4. harpie says:

    But it does say that to prove viability–to make a half-credible claim they weren’t insolvent and to evade restrictions on bonuses and political giving–they had an incentive to suggest their servicer income was enough to offset a significant chunk of their loan losses.

    …the bolded bit is quite important, imho.

  5. parsnip says:

    This fits in with what wavpeac keeps telling us about her mortgage servicer:

    My account number changed out of the blue in 2005. Numbers and balances change for no reason I can find on my statement. Every lawyer who has looked at my statements from GMAC has commented (and this includes the bankruptcy judge) that my statements are impossible to read for accuracy.

    …..bogus fees. All you have to do is google the complaints. People paying their bills on time were forced with insurance payments when they had insurance already and then foreclosed on with a bogus balance.

    cram down … would allow judges to “change” balances that are bogus or based on bogus fees so that we could get a real baseline on the value behind these mortgages. Almost all of these are padded with exorbitant fees and passed on…bought out with portions of these bogus fees in the mix. This is part of what made the real estate market peak. People were needed to ask for higher and higher amounts on their homes to cover these fees. For awhile, the market could withstand this, but the fees were bogus, not collectible but they were jacking up the stated value of these loans. This added a dimension to the mortgage crises that had never been there before.

    Borrowers/’consumers’ are treated as bottomless cash cows, or what Jeb Bush calls ‘fodder units.’ And HAMP was merely a government-sponsored means of perpetrating this same scam a bit longer, with a dose of that Obama ‘Hope’ as the hook to string out the mark a bit longer.

    • Gitcheegumee says:

      I don’t know if you are familiar with Inner City Press. They are out of the Bronx,and have been tracking issues dealing with mortgages and predatory practices by large financial institutions for years,now.

      Excellent source for financial updates seldom seen elsewhere.

      BTW, I appreciate your extensive knowledge on this subject, and your willingness to share with those of us who are less enlightened.

  6. parsnip says:

    Reading about many cases, including David Dayen’s HAMP article from yesterday, it seems that the banks/servicers decided to try to extract approximately $10,000 per borrower via bogus fees, and ‘lawyer fees’.

    This points to a glaring fact: many borrowers were forced into foreclosure via this scheme. Living paycheck-to-paycheck may be enough to pay one’s mortgage, but would never be enough to enable one to become current once these bogus fees start appearing on one’s statement. The servicers credit monthly payments first to the bogus fees, and what’s left, if any, gets credited to the mortgage payment, thus assuring another late fee, at minimum. So when using the term ‘valid foreclosure’ one must understand there are countess families no longer able to afford their mortgages due to bogus fees alone. And I suppose this is OK by David Axelrod.

    • wavpeac says:

      And they would keep the fees a secret as long as they could…I could not get a pay off amount to save my life while I was in foreclosure. This is when I first became acquainted with “foreclosure specialists” who would promise to get your bank to work out an agreement with you. Just the fact that these “foreclosure specialists” worked the deal out for you…(for a mere 1500.00$) should have been a big hint that these banks weren’t working with people at all. Not talking to them at all. I could not get a hold of anyone to give me a pay off until I went to the 3rd bankruptcy lawyer who through a special listing was able to tell me the name of the lawyer who had my case. Then I had to take the number (a foreclosure mill) and call it and beg for my pay off. Still did not hear from anyone…for about 6 weeks despite calling daily. Finally two weeks before the date of my foreclosure I was told the pay off which included an extra 12,000.00$ in fees that I had NOT planned on. I could have made my payments, I could have paid back the back payments (6 months worth) but I could not cover the extra 10,000.00$ in two weeks.

      This was all part of the scam.

  7. Fractal says:

    I’m getting tired of waiting for the “40 state AGs” to announce their goddam joint investigation. We have been reading teasers like this for at least a week, and still no announcement.

    And FL AG Bill McCollum has been claiming for weeks that he is “investigating” robo-signers and the law firms that used them, but he has not even contacted one of the key culprits, Lenders Processing Services.

    Check it out:

    Under Investigation

    Also under investigation by McCollum is Lender Processing Services Inc. The Jacksonville-based company has produced documents known as mortgage assignments with signatures of the same person that vary “wildly” from document to document, according to the attorney general. The documents are necessary for banks and mortgage servicers to show they have the legal right, or “standing,” to pursue foreclosure lawsuits. McCollum is investigating whether the documents have been forged.

    Michelle Kersch, a spokeswoman for Lender Processing, said the company hadn’t been contacted by the attorney general and would cooperate with any inquiries.

    I mean, what the fuck? Not even a subpoena with a “records hold” order? Not even the first step to freeze & protect evidence? Nothing?

      • Fractal says:

        who runs market-ticker? Karl Denninger? I see he was on Dylan Ratigan last week. Can you tell me more about him? I tend to avoid being steered to links when there’s no explanation of what the link says.

        • cbl2 says:

          Denninger certainly drives Market Ticker – apparently he is of a Libertarian bent – but as discussed here this morning – it doesn’t seem to be bleeding in to his reporting or his linking – and he has been on this story since late 06.

          have only been following him for about a week … in my case, I let what he is reporting speak for itself – if I catch him spinning, I’ll drop him – but just a cursory peek at the reports from the site from the last week reflects just one more site reporting on what is a huge story

  8. orionATL says:

    u.s. mortgage delinquency problems as viewed from the u.k. in feb, 2007 –

    three and one-half years ago:


    Note this passage:

    [ Fannie Mae has its own guidance on delinquencies:

    “First and foremost, Fannie Mae tries to avoid foreclosure. There are no winners when a home mortgage is foreclosed. It is the least desirable way to resolve a problem loan, and a terrible ordeal for the homeowner. It also is costly for Fannie Mae, as the investor, and for the loan servicer.

    “Homeowners who are having difficulties making their mortgage payments should immediately contact their mortgage loan servicer (the company to which they send their monthly payments) to discuss options.

    “Fannie Mae has instructed its lenders and servicers to avoid foreclosure whenever possible by offering borrowers who get behind in their mortgage payments various alternatives, including temporary forbearance, loan modification, and preforeclosure sales.” ]

    and this passage:

    [ “As the number of borrowers falling behind on their mortgage payments climbs to the highest level in five years, the mortgage industry is trying new strategies to help bail them out.

    “Much of the attention is on homeowners who in recent years took out adjustable-rate mortgages, a popular way to finance a home when interest rates were low. Now, with rates having moved up, many of these borrowers have recently seen, or soon will see, their mortgage rates adjust higher for the first time.

    “To head off problems, mortgage companies are reaching out to borrowers earlier. Bank of America Corp. is allowing some borrowers with ARMs to refinance into a different loan at no cost. Citigroup Inc.’s CitiMortgage unit is focusing extra attention on parts of California, Florida, and New York where home prices have moved up sharply. It is also contacting delinquent borrowers within days after a missed payment, if it doesn’t fit their normal bill-paying habits….

    “For some borrowers, efforts to work out bad loans can be complicated by the fact that many mortgages no longer are held by the banks that made the loans. Instead, roughly two-thirds of mortgages are packaged into mortgage-backed securities and sold to investors. How much leeway a borrower is given can vary, depending in part on the rules spelled out at the time the securities are created. Some agreements, for instance, don’t permit loan modifications or limit the circumstances under which a loan can be modified. Others put a cap on how many loans can be restructured…

    “The increase in bad loans is broad-based, with delinquencies rising in the past year in roughly 80% of the 250 local areas analyzed by Moody’s Economy.com. Some of the biggest increases have come in California, where high prices have made it hard to afford a home, and in other once-hot markets such as Las Vegas and Port St. Lucie, Fla. Among the handful of major metropolitan areas where delinquencies have fallen: Salt Lake City, San Antonio, and Albuquerque, N.M.

    “The rise in delinquencies is unusual because it comes at a time when the economy is relatively strong. Even though job growth remains healthy, ‘the total mortgage delinquency rate is the highest that it’s been since the depths of the (2001) recession,’ says Mark Zandi, chief economist at Moody’s Economy.com. He attributes the increase in part to the weaker housing market and the widespread use of adjustable-rate mortgages, many of which now are resetting at higher rates.” ]

    if this is creditable reporting, it seems the banks changed their tune between then and now.

    • wavpeac says:

      The banks have been making these statements for YEARS. I got a letter every month while in foreclosure urging me to connect with my lender to work out a deal, with a paragraph about how foreclosure hurts everyone. This was part of the scam. At the same time as I was getting these letters my calls were being directed to a voice message system where no one would return my call despite daily messages. I called the number on the letter that they told me to call. I remember back in 2007 watching the joint report on Agriculture and Finance on C-span. They were interviewing the mortgage companies about foreclosure. A GMAC spokeman stated…”Most people in foreclosure do not contact us to work out a deal. We estimate that over 80% of the people in foreclosure will not call to work it out”. I about lost it screaming at the television.

      This is when I knew that this scam was deep…orchestrated.

      There would never have been “foreclosure specialists” if people had been able to contact their lenders and just “work it out”. Not attempting to work it out, not maintaining contact is a RESPA violation. One I reported to the A.G and the FDIC with documentation of the letters and how my calls and faxes were handled. Nothing stopped the behaviors.

      I never would have been in bankruptcy or lost my credit if they had behaved like a reputable bank and followed the laws. I cannot help thinking about how many other people were just like me.

  9. parsnip says:

    In response to Gitcheegumee @ 16

    Thanks for the suggestion to check out Inner City Press.

    As for what you called my ‘extensive knowledge’: It’s based only upon extensive reading of blogs like this, Naked Capitalism, Market-Ticker, Matt Weidner, 4closurefraud, StopForeclosure, Rortybomb, Credit Slips, anything William K. Black writes, etc…..

    ….and personal experience trying to assist a friend, starting six years ago, when I first heard the terms ‘subprime’ and ‘mortgage broker‘ had no idea what they meant, but smelled a rat. I had the opportunity to observe one case unfold in real time, including descriptions of servicer abuse.

  10. JDM3 says:

    PS Just like when consumer lenders cry “non dischargeable debt” in Chapter 7 based on a “false financial statement.” The loan officer more often than not fills out the statement and leaves out debts that would disqualify the loan, then has the borrower sign it.

  11. oldtree says:

    Imagine a revenue source this large not being critical to ability to operate and pay for politicians, regulators and investigators? Wicked witch, bucket, water. Melting….

  12. Watt4Bob says:

    Losses to MBSs due to delinquency and foreclosure are distributed unevenly across the various tranches, higher tranches do not experience any ill effect until a relatively high percentage of loans default.

    HOWEVER, loses due to modifications, ie Cram-downs would cause losses across all tranches, which sort of explains why the HAMP program has been working so well, doesn’t it?

  13. Gitcheegumee says:

    Pardon if this has already been posted:

    Key Democrat accuses banks of ‘fraud’ in home foreclosure controversy

    By Michael O’Brien

    October 13, 2010

    A key Democrat accused banks of “fraud” in the emerging controversy over whether foreclosures have been properly administered.

    Rep. Maxine Waters (D-Calif.), a senior member of the House Financial Services Committee, suggested the recent epidemic of foreclosures are a result of collusion in the banking industry.

    “This is massive collusion and fraud,” she said during an appearance on CNBC.

    “It’s proven by the fact that you have millions of people in foreclosure who should have never been in foreclosure,” she added. “This just didn’t happen because there were a lot of irresponsible people. Think about it, this is unprecedented that this many people, all of a sudden, would be in foreclosure.”

    “These exotic products that were put on the market tricked them into mortgages they could not afford,” she said.

    Read the full article at:


  14. dokemion says:

    For those lawyers who do offer the service, it is now more expensive for their clients because it takes more of their time. This means that you will pay more for bankruptcy under the redesigned bankruptcy laws. For example, bankruptcy lawyers now have to personally attest to the accuracy of the information provided by their clients in the bankruptcy courts. This means that they have to take the time to personally research all of the information provided by their clients. The more time a lawyer spends with a client’s case, the more that case will cost.