The Investigative Process

Adam Levitin, one of the first people to tell investors how the foreclosure crisis may just point to much larger problems introduced by securitization, has this to say about what we need to do to get out of this mess.

I was glad to hear Ben Bernanke announce this morning that federal regulators would be looking into the faulty foreclosure process.  But how is this inspection going to work?  The only way to actually answer whether we have a systemic faulty foreclosure problem is to have legally trained personnel examine a healthy sample of actual loan files on both the servicer and trustee level.  Is that what the federal bank regulators are going to do?  Do they even have the personnel?   I don’t think bank examiners have the training to know what sort of legal documentation and procedures are required to properly consummate a foreclosure; it’s just not part of what they do.  And are they going to look at the actual loan files or just talk to the servicers and get reassurances?

The credibility of the federal response rests on the investigative process; unless there are sufficiently trained personnel looking at the actual files, we won’t know the real scope of the problem, and any clean bill of health will be a white wash. [my emphasis]

This gets at something I’ve been trying to get to in my continued rants about warranting titles. The legally trained people who would normally review titles on this kind of individualized basis are title insurer employees (I grant that they probably don’t have experience in tracking the trustee data, though my suspicion is that the easily identified problems, like robosigned documents, would be a good initial trigger point for further investigation into the securitization of the loan).

By having the banks warrant these loans, it makes it far less likely that the title insurers will do that kind of review (and remember, Fidelity National by itself looks at almost 40% of the titles that pass hands).

Now maybe there is someone besides the title company prepared to do this work, but I’m not hearing anyone besides Levitin talk about who that might be.

  1. klynn says:

    Now maybe there is someone besides the title company prepared to do this work, but I’m not hearing anyone besides Levitin talk about who that might be.

    Which may be why the US was dropped out of the 20 least corrupt nations.

  2. cregan says:

    It is unlikely Levitin knows what he is talking about.

    Having known a few bank examiners in the past, I can tell you they know very well what they are doing–on a micro level. The action of examining loans and their documentation very carefully–they look for criminal activity (again, on a micro level) all the time. So, they are very well trained in all the tell tale signs.

    And, the work is examining against the standard of perfect. Not, good enough. Establishing what is a perfect standard for foreclosures is not hard, even reporters and bloggers can do that. Checking all against that standard and detecting devious ways departures can be covered up is the specialty of these examiners.

    They are trained to pay very close attention to the most minute detail–things even you, a good sleuth, would miss. Over many years, lots of ingenious ways have been tried to pull off some fast ones. They have the experience to spot them. (But, they have to be brought in to examine. I the higher ups miss detecting where to send them, they can’t do anything about that)

    Again, this is all on a micro level. Is THIS file correct and exactly done right? The bigger questions are for the higher ups.

    If there is a problem or fraud, the bank examiners–if they even are tasked do this–will find it.

  3. DeadLast says:

    This is not the first subprime crisis or likely the last. In the early part of this decade, I was on a team that investigated the internal files of a major subprime lender (mainly manufactured housing with a strong target toward service member families). The lender had been accused of falsifying its data, because it had lower loan failures than the competitors consistently.

    The non-bank insurance company owner hired us to investigate because they had been hit with a shareholder lawsuit, and they did not know what was going on. The company was technically following its internal rules because they had the right to change the rules at any time (kind of an instant declassification).

    We identified the problems, the people who were in line for large performance bonuses were upset, and eventually, the insurance company and the lender crumbled in an accounting scandal. If as Cregan (#3) says, banks “know very well what they are doing”, then in this case, the fraud was much more widespread than our analysis was able to show. And that is very possible.

  4. scribe says:

    Gotta disagree with you on this.

    Foreclosures are not done to the “standard of perfect”. They are legal documents done to the standard of “Will the judge sign it”. Likewise, hte legal documents surrounding a sale of realty are not done to the standard of perfect.

    The recorder down at the county, who will enter the documents into the county records, does not care about their contents being correct except for a couple things – signatures in the appropriate places (not necessarily the Right signature, just a signature), the description of the property (so the records can be indexed properly), the presence of notary stamps (maybe they will care and maybe they won’t), and a couple other things. Like where to send the recorded copy and, most importantly, where is the money for their fee. As to the content of the documents, they don’t and won’t review them except for the most egregious errors. This is for two basic reasons – they aren’t lawyers and reviewing deeds, notes and mortgages for legal sufficiency is the province of lawyers, and their job is ministerial in nature, i.e., they are only there to stamp, record, and process the papers.

    This is complicated by the fact that, for the most part, real estate transactions are, or easily can be, sui generis. Each one, except if you are buying new from a developer in a big development, is likely a little different from another. It might be the way the title is being taken – are you buying it husband and wife or not? – or being given – is the seller a person, or a dead person’s estate? There might be a cobbled-together financing arrangement b/c the buyer needs to do it that way, or it might be with no mortgage at all. Used to be you could get someone coming in with all the cash they’d saved under the bed, but that’s gone the way of the dodo. But, the point there is that each set of documents is going to be a little – or a lot – different and there is bound to be a lot of room for lawyerly judgment.

    But, in reviewing a foreclosure, the idea a bank examiner could do the reviewing for anything beyond the most egregious errors and frauds is a big stretch.

    Finally, there’s the whole idea of “Completeness” – when FDIC or FSLIC comes in and takes over and set their examiners to work on figuring out just what the bank has and does not have, they look at the documentary records and only the documentary records. Any bank examiner (or banker, for that matter) probably knows (and should know) about the D’Oench doctrine, whereby all those oral or unwritten or unapproved-by-the-board side arrangements and forebearances and so on are thown out the window and into the dumpster (i.e., of no force or effect) the minute the examiners show up. To facilitate the examiners’ work, banks keep their records in pretty much a standard manner. That way, no one has to learn more than one recordkeeping method. Compare that to lawyers’ files, which run the gamut on completeness from anal to non-existent and their filing systems, which have a similarly broad range of variation.

    So, I’d put a bunch of lawyers on the team because otherwise the examiners will let a lot of crap pass without knowing it.

  5. thatvisionthing says:

    They might do an open source investigation — that is, open all their files and conclusions up to public review. I can imagine lots of experts willing to review both the evidence and conclusions.

    One case I’d watch is the Kentucky RICO case that Karl Denninger (market ticker) has been talking about. I heard it in a podcast — Ellen Brown wrote about it extensively in ForeclosureGate: Time to Break Up the Too-Big-to-Fail Banks? — and here are two postings Denninger has made about it. Lots of legal stuff there for legal eyes to ponder and opine on.

    MERS/MBS/Foreclosure Goes RICO

    Posted 2010-10-03 23:10
    by Karl Denninger
    in Corruption

    It’s about damned time.

    This is worth a read, even though it’s VERY long. The bottom line is that all the Tickers I’ve written on this subject, from bad conveyances into REMICs, to the tax issues, to the fraudulent documents, to the fact that the MBS are “empty boxes”, up and down the line – it’s all in here.

    Anyone who thinks this is a “nothingburger” after reading this has rocks in their head.

    This is a rather lengthy filing, 124 pages worth. It asserts virtually everything that I’ve written about for the last three years related to REMICs and MBS (that the notes were not conveyed and now can’t be under the law), and alleges Racketeering.

    I’ve read the whole thing, and want to present just a few short cites, but am embedding the entire document as well for those who “want it all”.


    Watch The Weasel Words! ASF
    Posted 2010-10-18 11:08
    by Karl Denninger
    in Foreclosuregate

    Now this is funny….

    Each of these firms believes that the conventional process for loan transfers embodied in standard legal documentation for mortgage securitizations is adequate and appropriate to transfer ownership of mortgage loans to the securitization trusts in accordance with applicable law. This process is sufficient to establish ownership by the securitization trusts. Over the course of the next two weeks, ASF will be releasing a white paper providing additional legal and market practice background regarding this process.”

    Notice the weasel: The process isn’t the problem. The problem is the process does not appear to have been complied with!

    In short, all the critical eyes on the foreclosure process have been from the public side. Everything from the government or business side–I know, same thing–has been whitewash.

  6. readerOfTeaLeaves says:

    The only way to actually answer whether we have a systemic faulty foreclosure problem is to have legally trained personnel examine a healthy sample of actual loan files on both the servicer and trustee level.

    Assessing the quality of the data? What a concept!

    • thatvisionthing says:

      Study’s been half done already I think — it was one of Bill Black’s two documents:

      The Two Documents Everyone Should Read to Better Understand the Crisis

      A rating agency (Fitch) first reviewed a small sample of nonprime loan files after the secondary market in nonprime loan paper collapsed and nonprime lending virtually ceased. The second document everyone should read is Fitch’s report on what they found.

      Fitch’s analysts conducted an independent analysis of these files with the benefit of the full origination and servicing files. The result of the analysis was disconcerting at best, as there was the appearance of fraud or misrepresentation in almost every file.

      [F]raud was not only present, but, in most cases, could have been identified with adequate underwriting, quality control and fraud prevention tools prior to the loan funding. Fitch believes that this targeted sampling of files was sufficient to determine that inadequate underwriting controls and, therefore, fraud is a factor in the defaults and losses on recent vintage pools.

      Of course, that’s only part of the chain chain chain — article is from 2009, before robosigningate made it apparent that necessary documents were missing or never existed — makes you wonder when Obama will recognize it’s broken.