By CW Covert, Executive Vice President, National Mortgage Investigation
Exotic Mortgage Products
In 1999, the Clinton Administration was under heavy pressure from powerful CEO’s of large investment banks, traditional banks, and government sponsored mortgage giants Fannie Mae/Freddie Mac to repeal the Glass-Steagall Act. This Act kept peoples’ hard earned savings, 401K money, pension money, and other investment money from being used to make or buy speculative mortgages.
With the repeal of Glass-Steagall, investment banks could now tap into billions of dollars of other peoples’ money being held within their institutions and put it to use in the mortgage market. The problem is that between 2000 and 2008, the mortgage industry went through a free-for-all period of lending to anybody; hiding it under the disguise of “everybody needs to own a home”. Trillions of dollars of other people’s money was used to create new mortgages with little caution to underwriting. What homeowners did not know is that the banks wanted the loans to fail because they bought insurance to back-up the risky loans they were making. If a borrower failed, the banks cashed in; so they kept making more and more risky loans.
Because investment banks could now make money creating mortgages with other people’s money, many new loan products were devised to qualify every type of borrower:
A. No Doc Loans. Only good credit scores needed. No job OK, no down payment OK, no
bank savings OK, no money in the bank OK.
B. Stated Income Loans. Same as “No Doc” except buyer needed to provide 30-60 days’ bank statements showing a few thousand dollars in cash. Loan officer could completely make up the borrower’s income to “qualify” them.
C. No down-payment loans. Banks even made these loans to investors. Some lenders didn’t care how many loans an investor had – many had over 50 rental property loans appearing on their credit reports and were still able to get more zero down investment property loans!
D. Loans at 100 – 125% of appraised value.
E. Interest only loans.
F. Pay Option Adjustable Rate loans. Every month, borrowers could pick between an interest only payment, a regular 30 or 15 year payment that pays the mortgage balance down, or a very low payment that only partially pays the interest on the home; meaning the shortage in interest got tacked on to the outstanding balance of the loan. This is called negative amortization. Homeowners were literally going backwards when they made the low payment.
G. Adjustable Rate Mortgages (ARM’s). Loan has an attractively low monthly payment for a set period (usually 2-5 years), then the rate adjusts with market interest rates. ARM’s were designed so that the rates would bump up – forcing the borrower to fail when they could no longer afford the payments.
H. Foreclosure Bail Out Loans. The name says it all. If a borrower was in foreclosure and had some equity, they qualified.
I. No Title Seasoning Guideline. A person could buy a home under market value, then refinance it immediately to pull cash out based on an inflated appraisal.
All of the above loans could be categorized under the term “Sub-Prime” because they ignored quality underwriting standards, or because the loans had low teaser rates that jumped up later on – forcing the borrower into default.
A Prime Loan is a loan that requires:
• A 20%+ down payment
• Proposed house payment doesn’t exceed 38% of the borrower’s monthly income
• Two year continuous employment – verified
• Very good credit with no delinquencies in the past 12 months.
• Perfect rental payment or mortgage payments within the past 12 months.
• Bank statements (or liquid investment accounts) must show at least 6 months of proposed mortgage payments and the 20%+ down payment.
• Income verified by lender.
• Usually a fixed interest rate that never jumps.
A Sub-Prime Loan…
• Overlooks one or more elements required to obtain a Prime Loan. It’s a loan made to very inexperienced or under-qualified borrowers with a higher probability of default.
With new money available to create and buy mortgages with as a result of the repeal of the Glass-Steagall Act in 1999, trillions of dollars went searching for borrowers. This put tremendous pressure on loan originators and appraisers to “make sure the deal closed”. The only way a deal wouldn’t close between 2001-2008 is if the appraisal came in short of the asking price in a purchase transaction, or below the borrower’s current mortgage in a refinance transaction. This led to inflated property values, putting home values up to new all-time highs. Many unscrupulous mortgage brokers, loan officers, street level investors and appraisers made sure properties were “coming in at the right price” so that everyone in the food chain was paid big commissions.
Pressure from Wall Street
Sensing an opportunity to profit from the deregulation of the banking industry, Wall Street firms began to “securitize” mortgages. This means that they would create trusts (money pools) by raising capital from investors all over the world, then give mainstream lenders like Countrywide or Chase the green light to lend the money – at all costs. So lenders, who were in a position of zero risk because they were playing with other peoples’ “trust money”, would make the loans to anybody and plop them into the trusts by the thousands.
Unfortunately, the investors in the trusts were led to believe through prospectus supplements prepared by the Wall St. firms that their money was safely secured by American homeowners who, historically, rarely default on their mortgages. The investors were sold on the idea that they would receive a monthly cash flow as homeowners paid their mortgages every month. In reality, and unbeknownst to the investors, the worst borrowers on “Main Street” were being targeted to borrow the investors’ money for home purchases or refinances – then fraudulently placed into the trusts. The sub-prime industry was now a well-oiled machine of deception.
Securitization essentially takes a group of financial instruments (such as mortgages) and packages them as a security – in this case “mortgage backed securities” (MBS). The theory of mortgage backed securities is that pools consisting of thousands of mortgages (the securities) would disperse risk and provide steady long-term income to the investors within the trust. Instead of simply depending on an individual mortgage to perform, investors could depend on a large number of mortgages to perform. Investors liked the ideology of MBS’s because they…
• trusted the banks who were selling the money,
• trusted the borrowers – historically mortgages are safe investment vehicles,
• could pick their risk levels by investing in safe mortgages with a lower rate of return, or they could
invest in riskier pools (known as tranches) for greater returns on their money,
• knew that if borrowers defaulted, the mortgages were backed with real property (homes).
Unfortunately, the investment banks and mainstream lenders lacked transparency; the investors’ money (which was to be used only for safe, secure loans) was misused badly on high risk loans:
• Mortgages were being issued to unqualified, financially unstable buyers – some unemployed.
• The value of the underlying real estate was over-estimated and over-valued.
• Wall St. investment firms were oftentimes selling one loan into multiple pools.
• The Wall St. firms bribed the ratings agencies such as Moody’s and Standard & Poor’s to rate the toxic mortgage pools “AAA” (the highest rating/lowest risk) despite the pools containing very risky loans and often missing loans!
Warning: this may cause nausea
These toxic Mortgage Backed Securities with bogus “AAA” ratings created by Wall Street firms were sold to:
• Pension funds
• Local governments
• Foreign countries
• Private and institutional investors
• Retirees in IRA’s and workers in 401k’s.
This explains why millions of people saw a tremendous reduction in their 401k and pension at the same time the mortgage market collapsed in 2008. Unbeknownst to them, their money was used to gamble with on risky loans…that eventually failed.
Also unbeknownst to the investors who bought MBS’s, Wall Street firms had created exotic investment instruments called derivatives to hedge the risk of the crummy loans they made with other people’s money. A derivative is like an insurance policy: it has no value until an event happens. In the case of risky mortgages, Wall Street firms bought derivatives that would pay them up to 100x the face value of the loan in the event that the loans failed! They bet against the loans they created to make enormous amounts of money, create inflation, and deprive tens of millions of homeowners of their property.
In 2008, the entire “house of cards” crumbled. Investors no longer trusted MBS’s so they quit buying them; worse yet, there wasn’t enough money to pay off all the derivatives that the Wall Street firms placed behind the risky loans they had already made. As a result, these firms were labeled “too big to fail” by the US government, who protected their profits by using a fund called “TARP” – the US taxpayer sponsored Troubled Asset Relief Program. Former Goldman Sachs CEO, and Treasury Secretary Henry Paulson, pulled the trigger to transfer trillions in TARP money to the banks and companies who insured their fraudulent mortgages through derivative insurance mechanisms. Instead of holding the participants of this hybrid mortgage and insurance scam accountable, he and his cohorts elected to honor every penny of derivative payouts, ensuring the banks that brought the global economy to its knees made enormous profits at the expense of taxpayers. Henry Paulson’s former firm, Goldman Sachs, made more risky loans and bought more derivatives than any other investment bank during the mortgage boom.
When word got out of the largest financial crime in global history, the institutional buyers of mortgage backed securities stopped buying; this is where we stand today. This explains why getting a mortgage is so tough now; nobody trusts the banks’ mortgage securities so the banks now have to hold the loans they make. Because the banks know they have to hold on to the mortgages they create, their underwriting standards are strict. They can’t dump fraudulent loans on unsuspecting investors anymore.
The results are in:
• Banks and Wall Street firms are having their best years ever while homeowners are struggling. This is because wealth is never destroyed, it is transferred. Homeowners paid billions in interest and junk fees to the toxic and fraudulent mortgages that were made using innocent investors’ and 401k/pension fund money. Then, politicians and bankers looted American taxpayers through the “bailout” because there wasn’t enough money to pay the credit default swaps and individual Fannie Mae/Freddie Mac insurance guarantees to the banks.
• Millions of homeowners could not make their payments – just as planned by the firms that created the loans. The plan was to make the loan, sell it, cash in on the derivatives when the loan failed, then foreclose on the home. The bailout funds paid the derivatives off because there wasn’t enough money to go around.
• Unemployment surged because investors no longer trust the banks; they don’t want their garbage securities anymore. Banks are carefully underwriting loans now because they know they have to hold onto them. This is why the economy is so slow.
• The “Housing Bubble” burst, and home prices crashed. In places like CA, AZ, NV, MI and FL homes were now worth less than half their previous value.
• Areas became blighted; other homeowners watched their home values plummet.
• The CEO’s of the companies that partook in this scheme received billions in bonuses, while homeowners were forced out of their homes.
Government “solutions” are ineffective
There was enough political pressure to cause the fading Bush administration to create the illusion that the government cared as much about homeowners as they did for the firms labeled “too big to fail”. In December 2008, programs such as “Help for Homeowners” were created. It failed – hardly anyone even knew about it. In April 2009, President Obama initiated the program known as “Making Home Affordable,” under the umbrella of the “Home Affordable Modification Program” or “HAMP.” http://makinghomeaffordable.gov
Supposedly, $75 billion was made available to banks to help homeowners modify the terms of their existing mortgages. They haven’t:
• The program was voluntary in nature; banks had complete discretion;
• The banks recovered money from the Fed if they modified mortgages.
• Qualifications:
- Demonstrate hardship (loss of job, illness, etc.)
- Mortgage payment above the “threshold” – 31% of gross income
- Ability to pay moving forward.
• Possible outcomes:
- Convert existing mortgage from adjustable to fixed
- Lower interest rate (as low as 2% if necessary)
- Payments in arrears placed at the end of the modified mortgage
- Principal reductions (short payoff)
The banks did not flinch at this program which was intentionally designed to fail from the beginning. Remember: the more mortgages that fail, the more money the Wall St. firms make as they cash in their derivatives. With not so much as a hand slap from our own government that supposedly “cares” about homeowners, the major banks have done the following:
• They have routinely “lost” homeowners’ loan mod paperwork; actually that is an excuse – upper management teaches junior employees to say they lost the paperwork to push homeowners closer to foreclosure.
• They provided phony fax numbers for submitting paperwork.
• They instituted artificial deadlines for paperwork submission and rejected applications that were even one day late.
• Fraudulently disqualified borrowers who truly qualified for HAMP under the government guidelines for a loan modification.
• They continued to foreclose on distressed homeowners while the loan modification was being “considered”.
• Less than 0.01% of homeowners got a principal reduction from HAMP.
• To date, less than 5% of all homeowners have obtained a helpful loan modification.
In short, loan modifications don’t work and most loan modification companies take a fee and don’t get a favorable result for the homeowner. This is why National Mortgage Investigation was founded. A homeowner cannot work out a reasonable deal with the banks unless their frauds are uncovered and presented to them.
The MERS fraud
As you already know, banks create pools of loans called mortgage backed securities (sometimes called CDO’s – or collateralized debt obligations). They buy and sell these securities from each other constantly. To keep track of all the buying and selling of mortgage debt, the bank CEO’s created the Mortgage Electronic Registration System or MERS in the mid 1990’s. With the MERS system, when a mortgage closed, it initially got recorded properly at the county where the home is located in because title company agents would do the recording. Then, the mortgage went to MERS for uploading into their electronic registry while the note went to the borrower’s current lender. This is where things get ugly.
An average loan gets bought/sold seven times in its life. Each time a mortgage is bought/sold, that activity is supposed to get recorded at the county where the home is located in. MERS did not do this; instead, it effectively skipped the recordation of mortgages within each county in the US, which is not only illegal, but it conceals the true holder of the mortgage – meaning nobody has the right to foreclose on the homeowner should they go delinquent! Operating their sham business, MERS saved billions of dollars in county mortgage recording fees.
Another fraud MERS is guilty of is bifurcation, or the separation of the mortgage/trust deed and the note. Until MERS, the mortgagee has always been the homeowner’s lender who makes the loan, owns the lien on the property, and also legally owns the right to foreclose should the homeowner not pay. Mortgages that are passed through MERS list “MERS” as the mortgagee on the homeowner’s mortgage document. This is fraud because MERS does not invest in mortgages or make loans; they simply record and assign them to other investors through their electronic database. The mortgage Note on the other hand, stays in the name of the actual creditor. This is a problem because once a mortgage and a note are separated the entire mortgage is null and void. Each document is codependent on the other; the mortgage (in MERS’ name) enforces the Note, which is in the hands of the true lender. MERS was named the “mortgagee” on 66+ million mortgages – making the loans unenforceable. The problem is that very few people know about the crimes related to MERS, so they keep paying their mortgages every month.
As television’s “60 Minutes” reported in April 2011, MERS and their vendors, acting on behalf of major mortgage lenders, were exposed for reverse engineering mortgage documents to make it look like everything was recorded properly and that MERS had standing to foreclose. They were also caught forging signatures (“robo-signing”) of supposed bank officers as witnesses on documents that facilitate the foreclosure process.
It’s for these reasons why it is imperative for everyone who obtained a mortgage between 2001-2008 to have a forensic loan document investigation and securitization examination performed by National Mortgage Investigation – whether they have already been foreclosed on or not.
