Wells Fargo, Freddie, Bank of America, and UBS at DOJ

As a number of people have noted, Reuters has an important story on a potential conflict of interest at DOJ: Covington and Burling, where Eric Holder and Lanny Breuer worked before coming to DOJ in 2009, wrote key memos leading to the creation and title transfer abuses of MERS.

A particular concern by those pressing for an investigation is Covington’s involvement with Virginia-based MERS Corp, which runs a vast computerized registry of mortgages. Little known before the mortgage crisis hit, MERS, which stands for Mortgage Electronic Registration Systems, has been at the center of complaints about false or erroneous mortgage documents.

Court records show that Covington, in the late 1990s, provided legal opinion letters needed to create MERS on behalf of Fannie Mae, Freddie Mac, Bank of America, JP Morgan Chase and several other large banks. It was meant to speed up registration and transfers of mortgages. By 2010, MERS claimed to own about half of all mortgages in the U.S. — roughly 60 million loans.

But evidence in numerous state and federal court cases around the country has shown that MERS authorized thousands of bank employees to sign their names as MERS officials. The banks allegedly drew up fake mortgage assignments, making it appear falsely that they had standing to file foreclosures, and then had their own employees sign the documents as MERS “vice presidents” or “assistant secretaries.”

Covington in 2004 also wrote a crucial opinion letter commissioned by MERS, providing legal justification for its electronic registry. MERS spokeswoman Karmela Lejarde declined to comment on Covington legal work done for MERS.

In the two years before they joined the Administration, Holder did over $5,000 of legal work for Bank of America and UBS. Breuer did over $5,000 of legal work for Freddie Mac and Wells Fargo.

That of course doesn’t reveal whether they were involved in the key 2004 letter–but it shows they did some kind of work for the most corrupt banks during the financial crash.

But Cynthia Kouril explains why the normal 2-year disclosure rules on this issue aren’t enough.

If DOJ were to bring criminal charges against the big banks for all the mortgage fraud, it would be really tough to do so without attacking MERS and the status of the alleged transfers made within MERS. A conclusive finding that MERS is and always was the dumbest idea on earth and that any L1 law student should have been able to see that, will destroy the law firm.

Even if Holder and Breuer are not planning to return to Covington after their stint in public service, their pensions are presumable tied to the viability of the firm.

That is, whoever signed off on the legal justification for MERS is a shitty lawyer. And for DOJ to go after the banks, a key part of that argument would require arguing that their former firm is a shitty lawyer. They may have big reasons not to want to do that.

Update: Recall that during the fight over Cheney’s interview report, Breuer did not disclose that he had helped Jon Kiriakou avoid testifying about who ordered him to investigate the Joe Wilson trip at the CIA. While temporally, he complied with his ethical guidelines, it was still the kind of thing he should have disclosed.

The Freddie Mac/Bank of America Settlement: Billions of Reasons to Actually Investigate the Loans

As Gretchen Morgenson tells it, the headline story from an FHFA Inspector General report on a $1.35B deal Freddie Mac made last year with Bank of America is that the analysis behind the deal was flawed.

Freddie Mac used a flawed analysis when it accepted $1.35 billion from Bank of America to settle claims that the bank misled it about loans purchased during the mortgage boom, according to an oversight report scheduled for release on Tuesday.

The faulty methodology significantly increased the probable losses in Freddie Mac’s portfolio of loans, according to the report, prepared by the inspector general of the Federal Housing Finance Agency, which oversees the company.

It’s not until the 11th paragraph that Morgenson reveals the underlying issue: Freddie Mac  refused to examine whether certain later-defaulting mortgages with unpaid principal amounting to $50 billion–ones originated during the peak of the housing boom–were defaulting because of bank representation and warranties defects before it settled with Bank of America. While it’s unclear how many of the 300,000 loans in this category were Countrywide loans covered in the settlement, of the Countrywide loans Freddie did review, they made buy back requests on 24% of them. So this might represent several billion in problem loans they didn’t make BoA buy back.

Back in March 2010, a senior examiner noted that a bunch of mortgages originated during the 2005-2007 period, when Option ARM and Interest Only mortgages were popular, were defaulting later than traditional mortgages–3-5 years after origination rather than during the first 3 years. He posited that the later default date might be because teaser rates were only beginning to end at that point, meaning that mortgages that had affordable for the first 3 years would become unaffordable after reset, leading to default.

[I]t would be reasonable to assume that many of the borrowers, faced with significantly increasing payments in the near term and very little equity in their home, made the decision to default before their [payments reset to higher levels]. It would also be reasonable to assume that the stated income and stated asset underwriting requirement played a role, but neither assumption can be tested without a review of the loans.

He raised this possibility with his supervisors and later, with Freddie’s senior managers, suggesting they review these later loans to test his theory (they attributed the atypical default pattern to falling house prices). Doing so was important, the senior examiner argued, because at that point Freddie only reviewed loans that had defaulted by the 2-year mark for reps and warranties defects.

In effect, Freddie might be exempting a whole class of the most exotic mortgages from reps and warranties review because they didn’t default until after Freddie’s review process stopped tracking them.

As an FHFA memo made clear, Freddie wasn’t reviewing for defects 93% of the loans originated in 2005-6 that had defaulted in the first half of 2010 (the graphic above shows the portion of loans that weren’t examined).

In response to the senior examiner’s concerns, in June 2010, a Freddie senior manager (someone who would report to Freddie’s CEO) agreed to do a review of these loans. But then, weeks later, a different senior Freddie manager stated he was “vehemently against looking at more loans.” That senior manager offered no justification, though others thought such an examination would make little difference and that doing the investigation might lose Freddie BoA’s business.

The senior examiner kept raising this issue–to at least 12 different FHFA people, including Acting Director Edward DeMarco. And when Freddie’s internal auditors reviewed the proposed settlement with BoA–which effectively settled all outstanding reps and warranties issues pertaining to Countrywide–they raised this sampling issue, too, and recommended Freddie do a sampling to see what might be included in these other loans. Because they were rushing to close the BoA deal, Freddie looked at a non-representative sample of mortgages (these came from all originators, not just Countrywide, which had a much higher defect rate than other banks) and declared everything kosher.

So to review: a senior examiner found $50B worth of defaulted mortgages that Freddie had not examined for reps and warranties and raised a plausible reason they might want to do so. Freddie agreed, then refused, to do so. Then, as Freddie was rushing through this BoA deal last December, Freddie’s auditors suggested they might want to check their math on these loans, so Freddie checked their math on a completely different set of mortgages. In spite of having a 6-month warning that up to $50B worth of loans might be a problem, Freddie signed away any BoA liability for good for the piddling price of $1.35B.

Of course, Tom Miller–with his $7.8B servicing deal with BoA–and Bank of New York Mellon–with their $8.5B investors deal with BoA–are trying to do this again. They’re rushing through settlements without taking the time to actually investigate the loan level data to see what the settlement should actually be. As the FHFA IG noted in its report,

Regardless of the cause of these defaults, the search for representations and warranties defects is the point of the loan review process; and if the search does not begin, then the defects will not be found.

Like Tom Miller and BNYM, Freddie was “vehemently opposed” to actually examine what they were settling with BoA on. And while we don’t know the cost, we might start calculating that amount in the billions.

And in the case of the possible bailout Freddie gave BoA because it refused to look at the loans, US taxpayers paid the bill.

Update: I originally conflated the amount of total loans that Freddie hasn’t been reviewing–$50B–with the amount of Countrywide loans in question. For other banks, Freddie should be able to do the analysis and make buyback requests for these exotic loans.

Coming Soon to Your Hard-Hit Neighborhood: Government-Subsidized TBTF Slumlords

I’m all in favor of creative ways to solve the foreclosure crisis. But I don’t think this is answer.

The government is soliciting ideas for ways to unload lots–big lots–of foreclosed properties currently owned by Fannie, Freddie, or FHA.

The Federal Housing Finance Agency (FHFA), in consultation with the U.S. Department of the Treasury and Department of Housing and Urban Development (HUD), has announced a Request For Information (RFI), seeking input on new options for selling single-family real estate owned (REO) properties held by Fannie Mae and Freddie Mac (the Enterprises), and the Federal Housing Administration (FHA).

The RFI’s objective is to help address current and future REO inventory. It will explore alternatives for maximizing value to taxpayers and increasing private investment in the housing market, including approaches that support rental and affordable housing needs.

“While the Enterprises will continue to market individual REO properties for sale, FHFA and the Enterprises seek input on possible pooling of REO properties in situations where such pooling, combined with private management, may reduce Enterprise credit losses and help stabilize neighborhoods and home values,” said FHFA Acting Director Edward J. DeMarco. “Partnerships involving Enterprise properties may reduce taxpayer losses and meet the Enterprises’ responsibility to bring stability and liquidity to housing markets. We seek input on these important questions.”

Kevin Drum rightly wonders what the point of this is, given that investors can already buy as many REOs as they want.

The point is volume: basically, the government would share ownership of the houses for such time as it takes the new owner to make them profitable again. And in exchange, the investor would be able to buy a bunch more houses.

The idea is to facilitate investors buying up whole chunks of homes in a particular market.

the agencies look forward to responses from market participants that have the technical and financial capability to engage in large-scale transactions with the Enterprises and/or FHA involving the disposition of REO.
A specific goal is to solicit ideas from market participants that would maximize the economic value that may arise from pooling the single-family REO properties in specified geographic areas. Under the management of a third-party, a joint venture or some other structure may respond to local economic and real estate conditions more effectively than individual sales. For instance, there may be certain metropolitan areas (or some narrower geographic designation) with a substantial number of REO properties and a strong rental market. In such locales economic value in REO disposition may be enhanced (and real estate markets begin to be stabilized) by turning a large number of REO properties into rental housing.

Call me crazy, but it seems the only reason such a program would be lucrative would be because it allowed one investor to corner significant chunks of the housing or rental market in a given city or neighborhood. Which, it would seem to me, would make for really abusive landlords: people with no competitive need to keep up their properties, with market dominance sufficient to raise rents beyond what the economy really supported, and enough pull at city hall to avoid accountability for doing these things.

Now, Jared Bernstein says we shouldn’t worry about using government subsidies to create TBTF slumlords.

I’ve heard two arguments against the idea.


Second, investors buying foreclosed properties in bulk make lousy landlords.  It’s a valid concern, but there’s a policy wrinkle in the FHFA/admin’s plan that should help: the proposal—the RFI noted above—should include requirements regarding property management and the Feds should reject proposals that aren’t convincing in that regard.

But really, the language purportedly protecting against TBTF slumlords is flaccid. It lists “address[ing] property repair and rehabilitation needs” as one of six objectives (after, it must be said, “reduc[ing] REO portfolios … in a cost-effective manner” and “reduc[ing] average loan loss severities.” It requires private partners take on “most or all day to day management and operations, including property maintenance and rehabilitation, rental property management, marketing for sale.” And it only requires proposed plans to address, “steps taken to ensure that the properties are well maintained and managed during the period” as item 7, after already emphasizing, as item 2, “a focus on maximizing returns.” Nowhere does it require these hypothetical landlords to charge reasonable rates for rents.

In other words, while this plan may include lip service to the upkeep of these properties, nowhere does it limit what kind of price gouging these TBTF landlords could engage in (indeed, it places more emphasis on financial return than on societal return).

And of course, as happens with most of these Third Way public-private partnerships (cf. health care reform and the Wall Street bailout), it deals away key enforcement mechanisms precisely by helping corporations avoid market forces and encouraging them to become so big they can’t be held to account.

Ultimately, this seems to be an effort to find a shortcut out of the housing crisis by engaging in more corporate subsidies. Plus, it’ll take several months to put the program together, whereas offering subsidies to everyone right now might be faster with less market-distorting effect.

If the government is going to be subsidizing turning these properties around anyway, why not subsidize the average people that have gotten so screwed over by TBTF corporations in the first place? Why not subsidize the people who create stable communities–actual community members–rather than asking corporations to restore communities? Why struggle again to limit market forces in a such a way that only the big boys benefit?

I know Obama likes to claim, falsely, that government can’t create jobs, and because of that claim he believes all government help must be laundered through corporations. But corporations can’t create communities, which is really what’s called for here.

Freddie Repossesses Its Files

Fannie Mae and Freddie Mac had already suspended all their work with David Stern. But now they’ve officially severed all relations with him and Freddie has taken their files away.

Freddie Mac took the rare step of removing loan files after an internal review raised “concerns about some of the practices at the Stern firm,” a Freddie spokeswoman said.

“We have begun taking possessions of all files on Freddie Mac mortgages simply to protect our interest in those loans as well as those of the borrowers,” the Freddie spokeswoman said. A Fannie spokeswoman declined to elaborate.

Fannie and Freddie said they will move those files to other law firms in the state but that they hadn’t yet identified where they would be redistributed. The firms said they had notified Florida’s attorney general about the decision to remove the files and that the Stern firm had cooperated with the action.

Let’s see. It’s November 2. On October 4, 29 days ago, the former assistant of the woman who oversaw Stern’s robosigner division testified that 1) Stern’s firm would routinely reclassify Freddie Mac loans as some some other firm’s loans when Freddie came onsite for an audit to hide those files from the firm, and 2) sometime in August, Stern reportedly packed up an eighteen wheeler full of documents and took them to an unspecified office in Orlando.

I can’t imagine why Freddie would want to take possession of its files, can you?

Problem is, it may well be far too late to prevent Stern from tampering with Freddie’s documents. Though it’s nice of them to start worrying about protecting the interests of their homeowners.

Fidelity National Drops Nationwide Indemnity Requirement

This whole title insurance thing is getting confusing.

Fidelity National Financial Inc., the largest U.S. title insurer, canceled a requirement for lenders to guarantee proper foreclosure procedures amid “heightened review” processes by banks.

The company won’t require an indemnity agreement before insuring individual foreclosed properties, according to a memorandum to employees yesterday. It will continue the arrangement with Bank of America Corp., the largest U.S. lender.

Fidelity National reversed course from a requirement put in place a week ago after institutions took steps to police foreclosure paperwork, according to the memo. Failure of other insurers to follow its lead also put the Jacksonville, Florida- based company at a competitive disadvantage, said Peter Sadowski, executive vice president and chief legal officer.

“Although competition was a factor, we wouldn’t take undue risk for competitive reasons,” Sadowski said in an interview. “We feel comfortable with the new process.”

But what I take it to mean is that, at least partly because other title insurers weren’t requiring Fannie and Freddie to indemnify their foreclosure sales, Fidelity National dropped the requirement that they (and other lenders) do so, too. But it’s not clear if, in lieu of this indemnity, Fidelity is going to require the lenders to actually prove they have standing to foreclosure.

Whatever the case, Fidelity National seems to be saying that a risk that was there just week ago, no longer exists.

Fannie and Freddie Near a Deal with Title Industry

As I noted in my last post on the move, led by Fidelity National, to require banks to warrant against “incompetent or erroneous affidavit testimony or documentation,” the move was largely about getting Fannie and Freddie on board and with them making this a standard practice in the industry.

So I’m not surprised by the report that that’s precisely what is happening. But I do find the description of Fannie and Freddie’s role in this process to be noteworthy.

The behind-the-scenes work illustrates how, as banks prepare to resume home repossessions, few entities have a greater interest in helping to put the foreclosure train back on track than Fannie and Freddie, which together own or guarantee half of all U.S. mortgages.

“They’re in a position to pursue good, straight, and solid answers. In that way, they play a quasi-regulatory role,” said Kurt Pfotenhauer, chief executive of the American Land Title Association, a trade group.


Still, the foreclosure-document crisis is raising an age-old question that has dogged the mortgage firms: Should they play the role of regulator, or business partner, with the mortgage originators and servicers that are their customers?

On one hand, Fannie and Freddie need to make sure foreclosures are proceeding properly. But on the other hand, they want to move the process along as fast as possible because each day that they can’t repossess homes, they lose more money and ring up a bigger bill for taxpayers.

“Given their public purpose and the special advantages they have in the marketplace, Fannie and Freddie should be a model to the whole industry of how to make sure the foreclosure process is working properly,” said Julia Gordon, a senior policy counsel at the Center for Responsible Lending.

But the firms’ regulator, and the companies themselves, say that the onus is on servicers to fix any problems and vouch for the quality of their foreclosure processes.

Fannie Mae “is not in a position to be the determining body as to whether servicers are putting processes in place that comply with the law,” a company spokeswoman said.

This is basically the government–as the owner and guarantor of Fannie and Freddie–basically saying the banks should just fix their own practices. No wonder that line sounds so similar to what we’re hearing from the Obama Administration.

And couple this disinterested stance toward servicer problems with the news that the government has known, since sometime after May, that there was a,

significant difference in the performance of servicers, and in particular, information that shows us there is not compliance with FHA rules and regulations around loss mitigation.

Yet it has not done anything about the servicers that it knows (but will not name) which have not followed required practices to try to keep people in their homes.

Note too the reference in the linked article to Fannie’s institution of fines on servicers that didn’t churn through their foreclosures in timely fashion.

The past practice of Fannie and Freddie shows they have every intention of keeping foreclosures churning through the system and government regulators appear to have no intention of slowing that churn. Signing this title insurance agreement is part of that same process.

We, the taxpayers, have become the owners of a system that churns inexorably on to evict us from our homes.

What Did David Stern Do with the Truck of Documents He Removed from His Office?

4ClosureFraud published another of the depositions from the FL investigation into foreclosure mill David Stern’s office. In it, Kelly Scott, the assistant of Cheryl Salmons–the woman who oversaw the robosigner aspect of their business–included details on how Salmons appears to have created her own lost title affidavits, how they would backdate affidavits of proof of service for foreclosures when the borrower hadn’t been served properly, and reclassify files to hide them from Freddie Mac when auditors would come for a visit.

But one of tidbits that seemed to surprise the lawyers had to do with Stern moving a truck load of documents offsite to another office.

Q. Did they say anything about what’s going on with Stern or Cheryl Salmons or anybody else?

A. The only concern was that they were moving files out of the office into a different office and that Eighteen Inch Freight, I think, was picking them up. Something like that. Trailer freight, something like that.

Q. Do you know where —

MS. CLARKSON: Eighteen wheeler?

THE WITNESS: Yeah, eighteen wheeler.

BY MS. EDWARDS: Q. Do you know where they were moving them?

A. Supposedly they were being moved to Orlando’s office.

Q. And do you know why they would do that?

A. No.

Q. Do you know how long ago this was going on?

A. I think a month and a half ago.

Q. What kind of office is Orlando?

A. David Stern has another law office in Orlando, Florida.

Q. What office is that?

A. I don’t know.

Q. And was it connected with the office here in Broward County?

A. Yes.

Q. And do you know which — what the office is there or what the location is?

A. No, I just know it’s another law office for David Stern that he’s opened for foreclosures in Orlando.

Q. And did he just open it a month and a half ago?

A. No. He opened it, I think it was either sometime at the beginning of this year or the end of last year. I can’t remember.

Q. 2010?

A. Yeah.

Q. Or December 2009?

A. It could be around that time. I just can’t remember.

Q. Well do you know if these files were being moved out over concern of the investigation?

A. Oh, I don’t know.

Q. Or just because they were moving files?

A. They were just moving a particular bunch of files to that office to be reviewed. That’s what — You know, my friend expressed that they were going to be reviewing them over there.

Mind you, this is hearsay, something Scott relayed that one of her friends still at the firm told her. And she has no reason to believe this is a response to the ongoing investigation into the case. (This deposition was taken on October 4, so the description of Stern moving files a month and a half ago would put it in roughly August.)

But this is the problem with the current treatment of all this fraud as mere “mistakes.” Because it leaves the chain of custody of such documents in the hands of the perpetrators to treat just as Enron did.

Hysteria over a $15 Billion Loan, But Not $285 Billion in Takeovers?

Man, the NYT’s pathetically bad reporting on the auto bridge loan continues.

David Sanger writes a story purporting to be news that presents a loan to the auto industry–with conditions–as a crisis of capitalism of epic proportions.

But what Mr. Obama went on to describe was a long-term bailout that would be conditioned on federal oversight. It could mean that the government would mandate, or at least heavily influence, what kind of cars companies make, what mileage and environmental standards they must meet and what large investments they are permitted to make — to recreate an industry that Mr. Obama said “actually works, that actually functions.”

It all sounds perilously close to a word that no one in Mr. Obama’s camp wants to be caught uttering: nationalization.

Not since Harry Truman seized America’s steel mills in 1952 rather than allow a strike to imperil the conduct of the Korean War has Washington toyed with nationalization, or its functional equivalent, on this kind of scale. Mr. Obama may be thinking what Mr. Truman told his staff: “The president has the power to keep the country from going to hell.” (The Supreme Court thought differently and forced Mr. Truman to relinquish control.)

The fact that there is so little protest in the air now — certainly less than Mr. Truman heard — reflects the desperation of the moment. But it is a strategy fraught with risks.

The first, of course, is the one the president-elect himself highlighted. Government’s record as a corporate manager is miserable, which is why the world has been on a three-decade-long privatization kick, turning national railroads, national airlines and national defense industries into private companies.

The second risk is that if the effort fails, and the American car companies collapse or are auctioned off in pieces to foreign competitors, taxpayers may lose the billions about to be spent.

And the third risk — one barely discussed so far — is that in trying to save the nation’s carmakers, the United States is violating at least the spirit of what it has preached around the world for two decades. The United States has demanded that nations treat American companies on their soil the same way they treat their home-grown industries, a concept called “national treatment.” [my emphasis]

"Not since Truman," Sanger writes, "has Washington toyed with nationalization."

"Not since Truman," that is, so long as you ignore the very recent nationalizations of AIG, Fannie, and Freddie.

Read more

Fannie and Freddie’s Turn at that Taxpayer’s Trough

You know how, when I go off grid on vacation or something, corrupt Bush officials tend to resign? Well, it looks like CalculatedRisk has that same power, only with our economy. While CR was hiking in the Sierra (man am I jealous), Fannie and Freddie were diving off a cliff on Thursday and Friday. And now, just as happened with Bear Stearns, Hank Paulson seems to be crafting a taxpayer backed bailout of the mortgage giants.

US TREASURY secretary Hank Paulson is working on plans to inject up to $15 billion (£7.5 billion) of capital into Fannie Mae and Freddie Mac to stem the crisis at America’s biggest mortgage firms.

The two companies lost almost half their market value last week as rumours of a government bail-out swept the stock markets, hammering share prices around the world.

Together, the two stockholder-owned, government-sponsored companies own or guarantee almost half of America’s $12 trillion home-loan market and are vital to the functioning of the housing market.

The capital-injection plan is said to be high on a list of options being considered by regulators as a means of restoring confidence in the lenders. The move would protect the American housing market, but punish shareholders in both companies.

CR, now back from the Sierra, has more

Golly. $20 billion for Bear Stearns. $15 billion for Fannie and Freddie. Meanwhile we’re still struggling to pass a housing bill that will help actual, human taxpayer families stay out of foreclosure. I guess there’s just not the money for bailing out real people, huh?