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Wall Street’s Chickens Are Coming Home to Roost

Posted by Larry Doyle on October 15, 2010 4:09 AM |

Fraud is fraud.

No matter how you disguise it — or dare I say, securitize it — fraud smells. That stench associated with improperly, and often fraudulently, originated mortgages is growing rapidly and is poised to back up into the Wall Street plumbing. The losses connected with the inevitable outcome of Wall Street banks having to repurchase fraudulently originated mortgages are enormous, although hard to quantify.

I highlighted this reality two days ago in writing, The Real Issues Behind the Foreclosure Crisis:

The imposition of principal forgiveness may actually be less expensive for banks and servicers than addressing the real root problem behind many mortgages. What is that problem? The fact that a lot of mortgages in our nation today were fraudulently underwritten from point of origination and were then fraudulently conveyed via mortgage securitizations.

I actually initially addressed this reality in November 2008 in writing, The Wall Street Model is Broken…and Won’t Soon Be Fixed:

At the turn of the century, the Wall Street model was a pure “originate to distribute” model with seemingly little to no residual risk on behalf of the originators or underwriters. When there is no residual risk, those who “WIN” are the players that can purely process the most volume. Well, how does one get volume? Lower the credit standards, put fewer restrictions on borrowers, little to no covenants (NINA Loans: no income, no asset check). WOW!!! What were we thinking?? Well, Wall St. felt, “let’s worry about it tomorrow or maybe not at all because we are making too much money today.”

Well, the “tomorrow” that Wall Street was not concerned about is now right around the corner. I further highlighted in the same 2008 commentary:

As Maryann Hurley, a Vice-President of D.A. Davidson recently said, “When the banks shed their balance sheets of a lot of these unwanted and poorly performing assets” they may start to lend again. Hurley added that consumers need to fix their balance sheets, as well, after years of going into debt. The lack of a rigorous underwriting process is coming home to roost.

She adds, “I’m guessing it’s not going to be before 2010 at best and it’s most likely 2011 before the economy really starts to turn around.”

Coming home to roost is right. Loud, long, and clear. The fact is, it is now October 2010 and the economy is not getting better nor will it anytime soon. The key question for our nation is just how will the courts handle the reality that so many mortgages were fraudulently underwritten, originated, and securitized? Will this literally become a matter of national security? Will the Obama administration allow the courts to work, or will the administration overrule the process of the judicial system in the ‘best interests of the nation’? Don’t think that abrogation of judicial process can not and may not happen.

For further enlightenment on this fascinating topic,  I strongly encourage readers to review a piece highlighting the impact of these developments on Bank of America. While this piece focuses on BofA, none of the large mortgage originators (JPM, Wells Fargo, Citi) will remain unscathed. This piece makes a lot of sense on cents. If there are any points you would like clarified, please do not hesitate to ask. Kudos to Business Insider for recently finding and posting Mortgage Repurchases: Bank of America’s Hidden Liability.

This mortgage fiasco has the potential to get very ugly.

Navigate accordingly.

Larry Doyle

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I have no affiliation or business interest with any entity referenced in this commentary. As President of Greenwich Investment Management, an SEC regulated privately held registered investment adviser, I am merely a proponent of real transparency within our markets so that investor confidence and investor protection can be achieved.

  • fred

    Thinking it through, the sale of the properties in question would seem to be ok, the problem would appear to be in the mortgage agreement or the forclosure processing legal requirements.

    This being the case, in the instance of foreclosure, the terms of the mortgage agreement would have to be renegotiated and the mortgage security holders would have the right to put back the security to the originator at par. In either case, banks (originators) will take a big hit on the problem mortgages in the area of 20-25%.

    I would also expect many other homeowners who purchased their homes after 2004 to default on there payments, just to see what happens. Worst case they default, take the hit to their credit rating and move on; best case they dont pay there mortgage for awhile and end up renegotiating principal and/or interest payments. 20-25% of principal would be worth the risk for many.

    What a mess! Any sense of a ground zero(s) or was the fraud widespread (just to get product out the door)?

    • LD

      Widespread…

  • Bernanke is a liar and a money printer. End the Fed
    http://fatboysez.blogspot.com/2010/10/bernanke-is-liar-and-money-printer.html

  • Dan

    This entire scenario is totally manipulated. Don’t tell me that the crowd at Treasury, the Fed, the FDIC, and all the other regulators were not FULLY aware of these issues two years ago and witnessed the ongoing fraud at play over the last few years.

    Save the system while forsaking every principle, virtue, and rule of law in the process. What system will come out of that?

    Thanks for bringing attention to these frauds and fraudsters!!

  • Mortgage Mess

    At what point does the entire escapade qualify as rackateering under the terms of RICO?






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