I read the news today
Oh Boy ...
A real guarantor is needed
By Ellen Brown
A foreclosure settlement between five major banks guilty of "robo-signing" and the attorneys general of the 50 states was pending for Monday, February 6; but late last week it was still not clear if all the attorneys would sign. California was to get over half of the US$25 billion in settlement money, and California attorney general Kamala Harris has withstood pressure to settle. As of late Monday, she was among those who had not agreed to the proposal.
That is good. She and the other attorneys general should not sign until a thorough investigation has been conducted. The evidence to date suggests that "robo-signing" was not a mere technical default or sloppy business practice but was part and parcel of a much larger fraud, the fraud that brought down the whole economy in 2008.
It is not just distressed homeowners but the entire economy that has paid the price, resulting in massive unemployment and a shrunken tax base, throwing state and local governments into insolvency and forcing austerity measures and cutbacks in government services across the nation.
The details of the robo-signing scam were spelled out in my last article (see Robo-signing casts a shadow, Asia Times Online, January 27, 2012.  The robo-signing fraud and its implications are expanded on below.
Why all the robo-signing?
Over half the homes in the United States are now held in the name of an electronic database called MERS - Mortgage Electronic Registration Services. MERS is a smokescreen behind which mortgages were sold to trusts that sold them to investors. The mortgages were chopped into pieces and sold as mortgage-backed securities (MBS), which traded in a supposedly liquid market. That meant the investors could sell them in the money market at any time on a day's notice. Yale economist Gary Gorton gives this example:
Suppose the institutional investor is Fidelity, and Fidelity has $500 million in cash that will be used to buy securities, but not right now. Right now Fidelity wants a safe place to earn interest, but such that the money is available in case the opportunity for buying securities arises. Fidelity goes to Bear Stearns and "deposits" the $500 million overnight for interest. What makes this deposit safe? The safety comes from the collateral that Bear Stearns provides. Bear Stearns holds some asset-backed securities [with] a market value of $500 millions. These bonds are provided to Fidelity as collateral. Fidelity takes physical possession of these bonds. Since the transaction is overnight, Fidelity can get its money back the next morning, or it can agree to "roll" the trade. Fidelity earns, say, 3 percent. 
That is where the robo-signing came in. Foreclosure defense attorneys armed with the tools of discovery have discovered that robo-signing - involving falsified signatures assigning mortgages back to the trusts allegedly owning them - occurred not just occasionally or randomly but in virtually every case. Why? Because the mortgages had to be left free to be bought and sold on a daily basis in the money market by investors. The investors are not interested in making 30-year loans. They want something short-term with immediate rights of withdrawal like a deposit account.
Hazards of borrowing short to lend long
The problem is that when panicked investors all exercise that right at once, there is no cheap funding available to back the 30-year mortgage loans, rendering the banks insolvent. That is what happened on September 15, 2008, when Lehman Brothers, a major investment bank like Bear Stearns, went bankrupt.
According to Representative Paul Kanjorski, speaking on C-SPAN in January 2009, the collapse of Lehman Brothers precipitated a US$550 billion run on the money market funds. A report by the Joint Economic Committee pointed to the fact that the $62 billion Reserve Primary Fund had "broken the buck" (fallen below a stable $1 per share) due to its Lehman investments. The massive bank run that followed was the dire news that Treasury Secretary Henry Paulson presented to congress behind closed doors, prompting congressional approval of Paulson's $700 billion bank bailout despite deep misgivings.
The sleight of hand that brought the banking system down was that the mortgages backing the money market were supposedly held by trusts that had lent money to homeowners for 15 years or 30 years. It was the classic "borrowing short to lend long", a shell game in which banks have engaged for hundreds of years, routinely precipitating bank panics and bank runs when the depositors or the investors all pull their short-term money out at the same time.
Shadow banking system unregulated
Periodic bank panics were averted in the conventional banking system only when the government agreed to insure the deposits of individual depositors in 1933. But Federal Deposit Insurance Corp insurance covered only $100,000 (now $250,000), and large institutional investors had far more than that to invest.
The shadow banking system, in which deposits were "insured" with mortgage-backed securities, developed in response. But the shadow banking system is unregulated and is just as prone to another collapse today as it was in 2008. The Dodd-Frank banking "reforms" barely touched it. As noted in an article titled "Risky Debt Use on Repo Market Hits 2008 Levels" in the Financial Times last week:
In the repo market, banks pledge their securities as collateral for short-term loans from money managers and other investors. The market played a key role in the build-up to the 2008 financial crisis. Banks used toxic assets, such as repackaged subprime loans, to secure trillions of dollars worth of cheap funding.
When the US housing bubble burst, the banks' trading partners refused to accept such securities as collateral and the repo market rapidly contracted.
However, a study by Fitch Ratings says the proportion of bundled debt being used as security in repo transactions has returned to pre-crisis levels.
Using the repackaged loans can increase risk in the repo market, the rating agency says. This is because the securities may be prone to sudden pullbacks such as the one experienced in 2008. 
We could be looking at another banking collapse at any time; and to fix the problem, we first need to know what is going on. The attorneys general should not agree to drop the curtain on the robo-signing scandal until all the evidence is on the table. It is not just a matter of punishing the guilty; it is a matter of a banking scheme based on fraud, one that ultimately does not work and has jeopardized the homes, savings and investments of the public not just recently but for hundreds of years.
The way out
There is another way to design a banking system. The deposits of large institutional investors do not need to be backed by sliced and diced pieces of our homes to be "safe" (something that has proven not to be safe at all). The large institutional investors seeking safety are largely "us" - the pension funds and mutual funds in which we have stored our savings and on which we rely for support when we can no longer work. Hundreds of years of history have demonstrated that the only reliable guarantor is the government itself.
Our pension funds and mutual funds need a government guarantee just as much as our individual deposits do. But we don't want to be guaranteeing the gambling and derivatives schemes of too-big-to-fail, for-profit Wall Street banks playing fast and loose with our money. Banking and credit need to be public utilities, operated for the benefit of the public in plain sight of the public...
Ellen Brown is an attorney and president of the Public Banking Institute, PublicBankingInstitute.org. In Web of Debt, her latest of 11 books, she shows how a private cartel has usurped the power to create money from the people themselves, and how we the people can get it back. Her websites are WebofDebt.com and EllenBrown.com.
Copyright 2012 Ellen Brown
Mortgage Settlement Lends Clarity to Banks
Bank of America benefits with its relatively large mortgage-market share.
By Moshe Orenbuch and Jill Glaser
50 state attorneys general launch mortgage foreclosure investigation<!-- start main content -->
I read the news today oh, boy ...
White House press secretary Robert Gibbs said Tuesday that the administration supports a multistate investigation. But he reiterated that the administration is wary that a freeze could cause "broader harm done to the housing market and to the housing recovery."
That view is in contrast to other Democrats who have called for a national moratorium on foreclosures. -- Washington Post, October 13, 2010
Among Obama's top contributors:
Goldman Sachs $994,795
Citigroup Inc $701,290
JPMorgan Chase & Co $695,132
UBS AG $543,219
Morgan Stanley $514,881
And that's just what was reported.
In late summer 2010, Modesto and Merced were ranked third for foreclosure rate and Stockton was ranked fifth. Rep. Dennis Cardoza, Pimlico Kid-Merced, represents parts or all of all three cities.
When the cities in the Kid's district rocketed to the top of the charts as the worst foreclosure disaster zones in the nation and then stayed there month after month for more than two years and are still in the top five, what did he do?
He moved his family to Annapolis MD, bought race horses, and whined.
Compare Pimlico to the congresswoman from northern Ohio, where even Cleveland's foreclosure rate had dropped out of the top 50 by the middle of 2009:
"[P]ossession is nine-tenths of the law," Rep. Kaptur told me. "Therefore, stay in your property. Get proper legal representation ... [if] Wall Street cannot produce the deed nor the mortgage audit trail ... you should stay in your home. It is your castle. It's more than a piece of property. ... Most people don't even think about getting representation, because they get a piece of paper from the bank, and they go, 'Oh, it's the bank,' and they become fearful, rather than saying: 'This is contract law. The mortgage is a contract. I am one party. There is another party. What are my legal rights under the law as a property owner?' "If you look at the bad paper, if you look at where there's trouble, 95 to 98 percent of the paper really has moved to five institutions: JPMorgan Chase, Bank of America, Wachovia, Citigroup and HSBC. They have this country held by the neck." -- Democracy Now! February 4, 2009
Unlike Cardoza, two of whose top contributors are banker PACs, Kaptur has no finance, insurance or real estate interests among her top contributors.
Rep. Kaptur did not, by any means, win all she fought for, but she stood up and fought instead of sticking her hand out to the bankers, like the Pimlico Kid has done. Her constituents knew she stood for them as clearly as we knew Cardoza, in his great fight to gut environmental law and regulation, stood for a handful of developers. Kaptur stood for the people; Cardoza for the parasites on the people -- crooked banksters, big landowners, developers and realtors.
We mention it only to remind the politically despondent, cynical residents of the 18th congressional district, whose politicql leaders feed them a steady ration of incompetence and corruption, that not all members of Congress are what the Pimlico Kid is.
Badlands Journal editorial board
50 state attorneys general announce foreclosure probe
By Ariana Eunjung Cha and Dina Elboghdady
The attorneys general of all 50 U.S. states announced Wednesday that they are joining to probe mortgage loan servicers who are accused of submitting false affidavits, but they stopped short of calling for a national moratorium.
The multistate investigation will initially focus on whether Bank of America, J.P. Morgan Chase, Ally Financial and other large mortgage companies made misleading or fraudulent statements to evict struggling borrowers from their homes.
Indiana Attorney General Greg Zoellersaid investigators initially will focus on whether industry employees - so-called "robo-signers" - signed off on thousands of foreclosures every month without reviewing the files as legally required. Homeowner attorneys also allege that lenders forged signatures and improperly notarized documents.
Such actions might have violated laws against unfair and deceptive trade practices, which could result in civil penalties. Typically the laws have been used to protect consumers from false advertising, but state officials say they could also be applied to foreclosure.
Law enforcement officials said they also could use their findings to press lenders to modify more loans for struggling homeowners or change how the industry processes foreclosures.
The companies could face more serious consequences if the attorneys general find criminal acts or that high-level industry executives knew what the robo-signers were doing. About two dozen states have joined the effort, though more are expected to sign up, officials said.
The investigation comes as more lenders are stepping up their reviews of foreclosures.
J.P. Morgan said Wednesday that it plans to expand is review of home loans from 23 states to roughly 115,000 in 41 states, saying it had "identified issues" in foreclosure documents.
On Tuesday, Ally Financial said it would expand its own probe to all 50 states. Ally had initially halted evictions in only the 23 states that require a court order for a foreclosure. Ally's move follows Bank of America's announcement last week that it would freeze foreclosure sales.
White House press secretary Robert Gibbs said Tuesday that the administration supports a multistate investigation. But he reiterated that the administration is wary that a freeze could cause "broader harm done to the housing market and to the housing recovery."
That view is in contrast to other Democrats who have called for a national moratorium on foreclosures.
Mortgage servicers have sought to play down the problems as minor technicalities, contending that nearly all of the files show borrowers missed their payments and deserve to lose their homes.
The states plan to share information and coordinate their investigations into improper foreclosures.
Ohio Attorney General Richard Cordray is taking a harder line. Last week, he became the first attorney general to sue a mortgage lender, in this case Ally, for improper foreclosures.
"The most important thing that the lenders need to recognize is the seriousness of the situation. They can't pretend this is a fourth-grade student not quite filling in the oval on a test. This is fraud," Cordray said in a phone interview. Ohio has asked the company to pay $25,000 per violation.
The initial announcement by the attorneys general said 49 states had joined the probe; Alabama was the exception. After receiving media inquiries, Alabama said it, too, would join the investigation. "To be clear, no violations of Alabama law have been alleged at this time. That said, we are troubled to see that mortgage lenders around the country were violating the procedures of our sister states," the attorney general's office said in a statement.
More on the Foreclosure Scandal and the Mortgage Machine
by Marian Wang
There are more headlines every day about banks using shortcuts and questionable paperwork to push through foreclosures. A group of 40 state attorneys general is expected to announce an investigation  this week into the mortgage servicing industry, while calls for a nationwide moratorium  on foreclosures — an idea the White House opposes  — have grown louder.
It’s not easy to follow, so we’ve dived in again to explain things.
If you’re just catching up on all this and are looking for more background, CNBC just published a helpful primer  about the foreclosure documents crisis, why it’s complicated, and why the issue has recently grabbed public attention, even though homeowners have experienced some of the same problems for years. (And if you like charts , here’s another primer.)
You can also read our Q&A  with attorney Geoff Walsh of the National Consumer Law Center, a legal advocacy group for consumers. He helps explain what the foreclosure process should have looked like, and why the problems with robo-signers  — individuals signing off without verification on thousands of foreclosure documents that assert, among other things, a right to foreclose — are linked to the problems with the loan modification programs, which we’ve also covered extensively .
Walsh emphasized that the furor over the discovery of robo-signing is a piece of a larger problem that extends beyond sloppy paperwork. The way he sees it, it’s part of a larger pattern that shows banks and servicers have an “intent not to comply with laws.”
CNBC’s primer also raises this possible explanation of why the sloppy paperwork and robo-signing could be just scratching the surface of a bigger problem:
"Now, if the problem truly is just sloppy work on the part of robo-signers, banks can likely resume foreclosures before too long. But many suspect that the reason banks were falsifying their knowledge about the possession of loan documents is that the banks do not actually have the documents and don’t know where to find them. This could permanently impair their ability to foreclose on some properties. … The most damaging thing that could happen to banks would be the discovery that they simply cannot prove they hold a mortgage on a house."
News of this kind of trouble has been bouncing around since the housing market first hit trouble three years ago  (reg.). Banks' selling off mortgages to Wall Street resulted not only in loosened lending standards, it also seems to have resulted in loosening bookkeeping practices . A key player in that part of the story has been the little-known Mortgage Electronic Registration Systems, or MERS.
The little-known company in the middle of major chaos
MERS is essentially a confidential directory created and owned by banks  to keep track of mortgage paperwork. It has tracked (or failed to, depending on whom you ask) exactly who holds owns the mortgage and has the right to foreclose on millions of American homes, should the homeowners default.
For instance, check out this 2009 New York Times graphic , which shows why MERS — which was designed to “reduce paperwork” and provide “clarity, transparency and efficiency” to the housing finance system — in some cases had the opposite effect. More from the Times , which reported in 2009 that MERS has saved banks more than $1 billion in the last decade, while making life “maddeningly difficult for some troubled homeowners”:
"If MERS began as a convenience, it has, in effect, become a corporate cloak: no matter how many times a mortgage is bundled, sliced up or resold, the public record often begins and ends with MERS. In the last few years, banks have initiated tens of thousands of foreclosures in the name of MERS — about 13,000 in the New York region alone since 2005 — confounding homeowners seeking relief directly from lenders and judges trying to help borrowers untangle loan ownership. What is more, the way MERS obscures loan ownership makes it difficult for communities to identify predatory lenders whose practices led to the high foreclosure rates that have blighted some neighborhoods."
Over the weekend, MERS defended its practices  and its CEO, R.K. Arnold, said in a statement that “MERS helps the mortgage finance process work better.”
The company also noted that courts have ruled in favor of MERS “in many lawsuits, upholding MERS legal interest as the mortgagee and the right to foreclose.”
But that’s not always been the case , and the company is now, more than ever, likely to be challenged by homeowners on that front.
A draft report on MERS released earlier this month  — before the furor over foreclosure documentation really took hold — raised some ongoing questions about the legality of MERS’ role in mortgage lending and foreclosures.
The report’s author, University of Utah law professor Christopher Lewis Peterson, noted that the common practice of using MERS as both a record-keeper and an entity having the right to foreclose on a property for the banks is legally incoherent. According to Peterson, it usurps a longstanding tradition of local governments' retaining records on property ownership. It also saves the banks money by allowing them to skirt recording fees that would otherwise go to these county and state governments.
A Primer On The Foreclosure Crisis...John Carney, Senior Editor
Last week, Bank of America announced that it was halting foreclosures in all fifty-states while it reviewed its foreclosure process for defects. Now several lawmakers on Capitol Hill are calling for other banks to initiate nationwide foreclosure freezes—a move which the Obama administration is currently opposing.
So what’s going on here? Why is the foreclosure machinery of our nation’s largest banks suddenly grinding to a halt? What does this mean for the financial sector and the economy?
Let’s start with the most basic questions first. Then I’ll explain some of the possible implications for homeowners, banks, and the economy.
How did this thing get started?
Ever since the housing bubble burst, there have been signs that there are serious problems with foreclosure practices. In some cases, the financial institution claiming it owns the mortgage has not been able to produce the underlying loan documents. In 2007, a federal judge held that Deutsche Bank lacked standing to foreclose in 14 cases because it could not produce the documents proving that it had been assigned the rights in the mortgages when they were securitized.
This decision was followed by similar rulings in other states stopping foreclosure proceedings. Typically the judges would find that the banks that were servicing mortgages pooled into bonds weren’t able to prove they owned the mortgages.
Why can’t they prove they own the mortgages?
Every time a mortgages changes hands, the new owners are supposed to receive an “assignment” of the mortgage notes from the buyers. The assignment is typically a short little document signed by both the seller and buyer of the mortgage acknowledging the sale, which is then attached to the mortgage documents themselves and delivered to the new owner.
When a mortgage is securitized it is typically sold to a Wall Street firm, which pools the mortgage with thousands of others. Investors buy slices of the pool, entitling them to cash-flows from the mortgage payments. The actual mortgages are assigned to a newly created investment vehicle. A servicer is tasked with ensuring the payments to borrowers get divided up properly and that delinquent borrowers get foreclosed upon.
Here’s where things get tricky. When a mortgage is securitized, the investors in the mortgage bonds don’t get assignments or notes. The investment vehicle doesn’t get the assignments or notes either. Instead, the physical notes are typically sent to a document repository company. The transfer of interests is noted in an electronic database.
But during the height of the housing bubble, investment banks were churning out mortgage bonds in such a frenzy, sometimes the assignments never got executed and mortgage notes never got delivered. Keep in mind that this was during the years when lenders were giving out low-doc and no-doc mortgages. It was inevitable that the fast and loose and slightly documented culture would not stop at the mortgage originator but stretch all the way through the process. (For more on this, see RortyBomb’s excellent discussion of the securitization process, complete with nifty and highly informative charts.)
For most mortgages, the note probably still exists somewhere. One problem that has arisen, however, is that some of the original mortgage lenders have gone under or been acquired by a larger bank. This can make tracking down the notes difficult, if not impossible.
Why am I just learning about this mess now?
This issue has been quietly simmering in the background of the housing crisis for quite some time. Gretchen Mortgenson of the New York Times wrote about it back in 2007. It gave rise to a “show me the note” movement of people contesting foreclosure proceedings.
But what really kicked off the latest developments was the deposition of a GMAC loan officer named Jeffrey Stephan, which revealed deep and perhaps pervasive flaws in the foreclosure practices of our largest banks.
Stephan admitted in a sworn deposition in Pennsylvania that he signed off on up to 10,000 foreclosure documents a month for five years. He said that he hadn’t reviewed the mortgage or foreclosure documents thoroughly. He quickly became known by the pejorative “robo-signer” for this way of getting mortgages through. This prompted Ally, which owns the GMAC mortgage company, to halt foreclosures in 23 so-called “judicial states.”
Because Stephan also signed foreclosures for hundreds of other mortgage companies, including J.P. Morgan Chase [JPM 39.84 -0.56 (-1.39%) ], the problem is not limited to GMAC. In fact, JP Morgan Chase also halted foreclosures in the judicial states.
Wait, what’s this about judicial states?
The majority of states in the country allow banks to foreclose on defaulted mortgages without going to court. They simply deliver the borrower a notice of the foreclosure sale. This is the method of foreclosure preferred by banks, since it is much faster and easier to execute the foreclosure sale, and much more difficult for borrowers to contest.
Twenty-three states, however, require banks to go to court to get a foreclosure order. These are the “judicial states.” In these states, banks are typically required to produce a sworn and notarized affidavit of a loan officer and submit the mortgage documents. Often, however, judges will issue foreclosure orders without the mortgage documents so long as the borrower doesn’t contest this point.
Keep in mind that in both judicial and non-judicial states, there are strong legal presumptions that favor the banks. So long as they have the mortgage note and the loan is delinquent—or so long as no one argues that they aren’t the owners of the mortgage or that borrower is not in default—the bank will almost always get the foreclosure.
But as the “show me the note” movement took off, more and more homeowners began to contest foreclosures by demanding to see the notes and, if the loan had been transferred or securitized, the assignment agreements. This typically was not fatal to banks seeking foreclosures. They could make up for the lost notes with lost note affidavits and retro-actively build an assignment chain. The worst that would happen, from the bank’s perspective, was that the foreclosure would be delayed.
In some cases, however, banks seem to have not even been able to manage even this kind of corrective action. Evidence has been produced to show that notarizations have been faked, documents forged, and folks like Stephan have simply been operating as foreclosure bots.
So is this just a concern for “judicial states?”
Although banks first shut down foreclosures in judicial states, the lack of documentation is a problem in any jurisdiction. Homeowners contesting foreclosures in both non-judicial and judicial states can win if the bank cannot provide documents proving it owns the mortgage.
In judicial states, however, the banks are especially exposed because they must initiate a lawsuit to get a foreclosure. If they have been submitting false documents to the court, they could be sanctioned and fined. Realizing that they had few internal controls over their own foreclosure practices, banks wisely shut down foreclosures in the states where they had the most exposure.
In non-judicial states, banks aren’t required to submit anything to the court until they are sued by a homeowner seeking to stop a foreclosure. That means that they are far less likely to submit fraudulent documents, since the process has already been slowed. Nonetheless, banks may still find themselves swamped by challenges. No one really knows how badly the missing documentation problem is at the banks.
The Wall Street Journal told me this is just about “paperwork” and politics. Are we making a mountain out of a molehill?
Our friends at the Journal are seriously misguided on this issue. (Note: my brother, Brian Carney, is on the editorial board of the Journal.)
The requirement that banks be able to prove ownership of mortgages by producing notes and assignments reflects a long-settled view about the necessity of written contracts in real estate transactions. Long before the founding of our Republic, England adopted what is commonly called the “Statute of Frauds.” It required that real estate conveyances be recorded in writing and signed. Similar laws apply in almost every state in the Union.
Part of the point of the writing requirement is to allow the government the transparency it needs to enforce property rights, including the right to foreclose on a home. If courts were to treat this as mere “paperwork” that was irrelevant to the cases, both property rights and the rule-of-law would suffer. It’s surprising that the Journal’s editorial page would take this stance.
Now, if the problem truly is just sloppy work on the part of robo-signers, banks can likely resume foreclosures before too long. But many suspect that the reason banks were falsifying their knowledge about the possession of loan documents is that the banks do not actually have the documents and don’t know where to find them. This could permanently impair their ability to foreclose on some properties.
What does this mean for the banks?
In the first place, the slowdown in foreclosure sales might hit the revenues of the banks. The defaulted loans aren’t spinning off revenue and now the foreclosures aren’t producing revenue either. If the foreclosure freezes last long enough, this could it the bottom lines of the banks. At the very least, banks should be adjusting the estimates on the likelihood of short-term recovery values for their mortgage portfolios.
The fact that banks securitized loans but did not get proper assignments of the mortgage notes may find themselves liable to lawsuits from investors. A typical mortgage bond issuance includes representations and warranties that all the proper documentation has been obtained. Banks could find themselves liable for a breach of these warranties.
This could also turn into a fight between investors of junior and senior tranches of mortgage bonds. Here’s how the Journal describes this fight:
"When houses that have been packaged into a mortgage bond are liquidated at a foreclosure sale—the very end of the foreclosure process—the holders of the junior, or riskiest debt, would be the first investors to take losses. But if a foreclosure is delayed, the servicer must typically keep advancing payments that will go to all bondholders, including the junior debt holders, even though the home loan itself is producing no revenue stream.
The latest events thus set up an odd circumstance where junior bondholders—typically at the bottom of the credit structure—could actually end up better off than they expected. Senior bondholders, typically at the top, could end up worse off."
Not surprisingly, senior debt holders want banks to foreclose faster to reduce expenses. Junior bondholders are generally happy to stretch things out. What is more, it isn't entirely clear how the costs of re-processing tens of thousands of mortgages will be allocated. Those costs could be "significant" said Andrew Sandler, a Washington, D.C., attorney who represents mortgage companies.
The most damaging thing that could happen to banks would be the discovery that they simply cannot prove they hold a mortgage on a house. In that case, the loan would probably have to be written down to near zero. Even for current loans, the regulatory reserve requirements would double as the loan would no longer be a functional mortgage but an ordinary consumer loan. Depending on the size of the “no docs” portion of the loan portfolio, this might be a minor blip or require a bank to raise new capital to fill the hole in the balance sheet.
What does this mean for the housing market and the economy?
Get ready to hear the phrase “pig through the python” a lot. For example, “We need to get the pig through the python very quickly so that the market can be free of uncertainty.”
This is the favorite metaphor of bankers discussing the foreclosure crisis. The idea is that anything that slows down foreclosures will unsteady the housing market. There’s a lot of truth to this. Buyers will hesitate to bid on foreclosure sales if they are not confident the foreclosure is legitimate. Other buyers may worry that the lack of foreclosure sales in an area is a false indicator of the health of the local housing market.
Banks concerned about the recovery values of their mortgage portfolios and higher capital requirements, may pull back lending even further than they already have. In short, this could be the beginning of the second leg of the credit crunch.
GMAC’s ‘Robo-Signers’ Draw Concerns About Faulty Process, Mistaken Foreclosures
by Marian Wang
Several states have ordered a freeze on foreclosures  by Ally Financial’s GMAC mortgage unit , which has come under fire in court for using “robo-signers ” who signed off on thousands of foreclosures attesting to the accuracy of the documents without having much personal knowledge of what they contained.
Several other states are investigating  GMAC after the company said last week it was suspending foreclosure evictions and sales  in 23 states due to “a procedural error” that could require the servicer to “take corrective action  in connection with some foreclosures.
One robo-signer, Jeffrey Stephan, has signed off on as many as 10,000 foreclosures a month, according to court records. The foreclosure affidavits, which established basic facts such as a bank’s ownership of a mortgage , were also required to be signed in the presence of a notary public. That didn’t always happen, either. (Since then, other GMAC employees  have also been flagged as possible robo-signers.)
GMAC, however, seems to believe that this lack of review didn’t result in real consequences for homeowners. Its statement from Friday, as reported by the Charlotte Observer :
"We are working to resolve the situation expeditiously, and we are confident that the processing errors did not result in any inappropriate foreclosures and that the substantive contents of the affidavits in question were factually accurate."
GMAC is a subsidiary of Ally Financial, of which the U.S. Treasury currently owns about 56 percent. (GMAC was renamed Ally  after its rescue.) "The entire situation is unfortunate and regrettable and GMAC Mortgage is diligently working to resolve the situation," Ally Financial said in a statement .
GMAC has stopped foreclosure evictions in states that are known as “judicial” states, meaning they require a court order to foreclose. Similar procedural errors may have also been made in non-judicial states, but foreclosures there were not halted  by GMAC.
Since news of GMAC’s review spread, JPMorgan Chase has been the next to come under such scrutiny, based on statements made in May by a Chase mortgage supervisor.
In a court deposition, Beth Ann Cottrell said she was among eight managers who together signed about 18,000 documents a month — documents that she was expected to have personal knowledge of. Bloomberg quoted from her deposition :
"Asked how they were prepared, she said she relied on other people at the firm.
'My review is more or less signing the document unless it’s questionable,' she said. That means, 'somebody has a question and brings it to me and says, ‘Beth, can you take a look at this?’”
JP Morgan, the nation’s third-largest servicer, declined to comment  ($) to the Financial Times on the matter.
Problems with the paperwork behind foreclosures aren't exactly new, but are now starting to get more attention. Here’s Bloomberg :
"Judges overseeing foreclosures in the wake of the housing crisis are growing skeptical of banks, said Christopher L. Peterson, a professor at the University of Utah’s S.J. Quinney College of Law. A surge in proceedings has helped expose a variety of paperwork lapses, he said in an interview.
'Early in the process the judges were very cavalier and they just took the financiers’ word,' Peterson said. 'Now there are enough disputes out there about ownership of loans that the judges are starting to feel like they need to hold the financial institutions to the basic rules of evidence.”'
The nation’s top five mortgage servicers — Bank of America, Wells Fargo, JPMorgan, Citigroup, and GMAC — have a combined 71 percent share  of the market, Bloomberg reported.
These problems with the underlying processes mortgage services are using to speed foreclosures are separate but related to the disorganization that causes servicers to make mistakes such as foreclosing  on the wrong house .
As we’ve reported, breakdowns in communication  between different parts of the banks — the part that forecloses and the part that tries to help  homeowners avoid foreclosure — have exacerbated these problems.
Congresswoman Marcy Kaptur, 9th District, Ohio
Standing Up To Wall Street Greed
We have suffered the largest transfer of wealth from Main Street to Wall Street through both the housing crisis and the financial crisis. The six largest banks, Bank of America, JP Morgan Chase, Citigroup, Wells Fargo, Goldman Sachs, Morgan Stanley, and Metlife, Inc, now hold over two-thirds of our nation’s assets.
The Dodd-Frank Wall Street reform bill did not go far enough in addressing the challenges facing our financial system. For example:
• It did not replace and strengthen Glass-Steagall, separating commercial banking from investing or speculation.
• It did not reform the credit rating agencies, which had a starring role in the misdirection of investors, including the fundamental business model of the credit rating agencies.
• It did not force every derivative to be traded openly and transparently on an exchange.
• It did not end too big too fail.
• It did not prevent Wall Street banks from replacing community banks.
• It did not encourage prudent lending.
• It did not strengthen support for those agencies finding and fighting fraud in our financial system.
• It did not properly address the housing crisis.
Almost two years ago, I fought against the Troubles Asset Relief Program and I did not vote for it the two times it was brought up in the U.S. House of Representatives.
The clever comedic tale that is being spun by Wall Street megabanks here in Washington is that they are paying back the $700 billion our taxpayers bestowed on them in the fall of 2008, and so the cost to the American taxpayer will be low.
They want everyone to look at the TARP and not at the big picture, the real cost of the crisis, or the real losses thrust upon the American people. The American taxpayers need to be paid back for ALL the damage the Wall Street and its reckless banksters did to our economy.
Letter to U.S. Attorney General Holder on SEC’s Charges Against Goldman Sachs
On April 16, 2010, the U.S. Securities and Exchange Commission (SEC) announced that it has charged Goldman Sachs with committing fraud in a mortgage deal. In particular, the SEC claims that Goldman Sachs created an instrument designed to fail. However infuriating this may be to learn of at this time, this case is neither unique nor isolated, and the evidence is mounting daily to this end.
It is critical that the integrity of our financial system is restored with the American public and the world, and one step on this path is prosecuting the criminals acting within our financial system. While the SEC lacks the authority to act beyond civil lawsuits, the U.S. Department of Justice (DOJ) has the power to file criminal actions against those who commit financial fraud.
Therefore, I led a letter with sixty-one bipartisan colleagues to U.S. Attorney General Eric Holder seeking assurance that the DOJ is closely looking at this case and similar cases to further investigate and prosecute the criminals involved in this and other financially fraudulent acts. Furthermore, the letter requests that if the DOJ is not currently looking into this particular case, that the U.S. Department of Justice immediately opens a case on this matter and investigates it.
In part, the letter states, “If both global and domestic confidence in the integrity of the U.S. financial system is to be regained, there must be confidence that criminal acts will be vigorously pursued and perpetrators punished.”
In addition, I delivered 140,000 citizen petitions to the U.S. Department of Justice in support of the letter I led seeking to investigate Goldman Sachs and others. The Department of Justice announced two days later that they were investigating this and other related matters.
Goldman settled the case with the SEC on July 15, 2010, for $550 million and admitting no wrongdoing.
Legislation I Have Sponsored
H. Res 186: National Residential Mortgage Emergency Sense of the House of Representatives
This bill would express the sense of the House of Representatives that the States should enact a temporary moratorium on residential mortgage foreclosures.
H.R. 1123 the Produce the Note Act of 2009
This bill prohibits foreclosure proceedings unless the person commencing the foreclosure complies with specified prerequisites, including identification of the actual holder of the mortgage note and the originating mortgage lender, as well as other items.
In addition, this bill requires the person commencing the foreclosure to notify the mortgagor, in writing, not less than five days before any action is taken to commence foreclosure, a large amount of information including who one can speak to at the bank.
H.R. 1929, the Fannie Mae and Freddie Mac Investigative Commission Act
This bill establishes the Fannie Mae and Freddie Mac Investigative Commission to investigate and make recommendations to Congress regarding certain decisions of the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) that led to their financial instability and federal conservatorship.
H.R. 3452, Recoupment of Wall Street Bonus Act
Taxes the bonuses of Wall Street at 100% and directs the proceeds to HUD community development programs
H.R. 3858, Democratizing the Federal Reserve System Act
The bill cuts the time of service of a FR Board of Governor from 14 to 7 years. In addition, it requires that the person nominated for Chair of the FR Board of Governors (FRBG) has served at least 2 consecutive years on FRBG prior to nomination, and for Vice Chair, she or he must have served on the FRBG for one year.
Furthermore, it increases the post-service restriction of holding any office, position, or employment in any member bank from 2 to 4 years and limits the amount of time that vacancies can remain on the FRBG (currently 2 seats are vacant).
Lastly, it changes the Full Open Market Committee voting structure to include each of the 7 members of the FRBG and 6 of the 12 Federal Reserve Banks one year, and the other 6 in the following year. This democratizes the committee that sets interest rates.
H.R. 3995, the Financial Crisis of 2008 Criminal Investigation and Prosecution Act of 2009
This bill authorizes: the Director of the FBI to hire 1,000 additional agents and additional forensic accounting experts; the Attorney General to hire more Federal prosecutors; and the Chair of the Securities and Exchange Commission to hire more investigators, to catch and prosecute these white collar criminals and prevent their continued criminal activities.
H.R. 4254, Community Bank Preservation Act
This bill directs TARP repayments to the Deposit Insurance Fund of the Federal Deposit Insurance Corporation, to reduce the amount of any increase in premiums of smaller insured depository institutions and community banks whose prudent activities did not contribute to the financial crisis.
H.R 4377, Return to Prudent Banking Act
To repeal certain provisions of the Gramm-Leach-Bliley Act and revive the separation between commercial banking and the securities business, in the manner provided in the Banking Act of 1933, the so-called `Glass-Steagall Act'. The affiliations currently between certain entities would be required to be dissolved, this breaking larger institutions into smaller ones.
The federal government and state attorneys general reached an agreement with the five largest mortgage servicers to address mortgage-loan servicing and foreclosure practices.
The settlement totals $25 billion among the five largest mortgage servicers including Bank of America (ticker: BAC), Citigroup (C), JPMorgan Chase (JPM) and Wells Fargo (WFC). Clarity surrounding the foreclosure settlement should serve as a positive for the largest mortgage servicers. While we recognize that other mortgage issues remain (ie, mortgage putback claims, etc), the finalization of the robo-signing issue is one step closer to more normal functioning of the mortgage market.
Importantly, the largest mortgage states including California, New York and Florida agreed to join the 49-state settlement. The addition of these large states improves the significance of the settlement as these large states alone represent approximately 20%-25% of total number of mortgage loans serviced in the U.S.
The settlement includes $20 billion in relief to homeowners and $5 billion for various state and federal programs, which is essentially in line with expectations. The settlement includes a provision regarding increased efforts regarding principal modifications, as well as strengthened procedures around servicing and foreclosures.
Given that the foreclosure settlement has been pending for some time and the settlement amount came in line with previous press reports, the large banks have already made substantial accruals related to this settlement. Bank of America, Wells Fargo and JPMorgan issued press releases indicating that existing reserves were sufficient to cover relief programs and cash payments.
Separately, Citigroup announced that it will adjust fourth-quarter 2011 and 2011 results to reflect an $84 million after-tax charge, in addition to a $125 million after-tax charge related to the resolution of related mortgage litigation. Overall, loan-loss reserves for residential mortgages and home equity stand at about $55 billion-$60 billion for our large-cap banks and represent approximately 28% of the borrower relief announced with this settlement.
The finalization of this settlement should provide relief to the large banks, with Bank of America in particular, given its relatively large mortgage-market share and issues surrounding its mortgage business. The settlement compensates for the robo-signing issues and allows the servicing industry to move forward.
In our view, this could help ease the log-jam of the foreclosure pipeline. Bank of America, Citibank and JPMorgan are rated at Outperform and Wells Fargo is rated at Neutral.