The Big Picture

Copyright, Links, Fair Use & Reproduction

Sunday, May 18, 2008 | 06:30 AM

I get requests from publishers to link to, and/or reproduce, content here all the time.

Copyright law is pretty clear as to what is legal: Anyone can link to any content on the internet, including "deep links." It is considered "Fair Use" to reproduce a paragraph or two -- a small proportion of the total article -- in another work. Reproducing the entire work without the Author's permission is not allowed.

Now you know . . .

illustration via Eric J. Heels

Feds Expand Mortage Fraud Investigation

Monday, May 05, 2008 | 06:43 AM

in Legal | Real Estate | Taxes and Policy

You mean not following Federal banking laws is a crime? Who knew?!

"Federal agencies are intensifying a criminal investigation of the mortgage industry and focusing on whether some lenders turned a blind eye to inflated income figures provided by borrowers.

The Federal Bureau of Investigation and the criminal division of the Internal Revenue Service have formed a task force to examine mortgages that were made with little or no proof of the earnings or assets of borrowers, a government official who had been briefed on the matter said Sunday . . .
The task force, which was established in January, stepped up its investigation in recent weeks as the financial industry disclosed billions of dollars in additional write-downs from bad mortgage investments. The latest inquiry is broader and deeper than a separate F.B.I. investigation of mortgage lenders that is also under way . . .

In January, the F.B.I. began a wide-ranging investigation of 14 unnamed mortgage companies over their lending and business practices. Those smaller inquiries have tended to focus on local foreclosure schemes. That F.B.I.-led inquiry has since expanded to include several more firms. In March, the Justice Department and the F.B.I. began investigating whether the Countrywide Financial Corporation, the troubled mortgage giant, misrepresented its financial condition and loans in filings with the Securities and Exchange Commission."

No word about any investigations into Predatory Borrowing . . .

Previously:
Tyler Cowen: "Predatory Borrowing The Bigger Problem"
http://bigpicture.typepad.com/comments/2008/01/apologist-for-f.html

Source:
Government Intensifies Mortgage Investigation
LYNNLEY BROWNING
NYT, May 5, 2008
http://www.nytimes.com/2008/05/05/business/05lend.html

So Long, and Thanks For All the Fish!

Wednesday, March 12, 2008 | 12:11 PM

in Books | Legal | Politics

Spitzer has officially resigned.

I was trying to come up with a clever headline for his resignation, but the best I could come up with was the title of Douglas Adams Hitchhiker's Guide to the Galaxy title.

Can anyone come up with anything better?

Sources:
Spitzer Resigns, Citing Personal Failings
DANNY HAKIM and ANAHAD O’CONNOR
NYT, March 12, 2008
http://www.nytimes.com/2008/03/12/nyregion/12cnd-resign.html

Eliot Spitzer Resigns as Governor;
Lt. Gov. Paterson to Succeed Him
A WALL STREET JOURNAL ONLINE NEWS ROUNDUP
March 12, 2008 12:08 p.m.
http://online.wsj.com/article/SB120532420627930015.html

Ode to NYS Governor

Tuesday, March 11, 2008 | 04:45 PM

in Legal | Politics

From one of the comments on our earlier post:

Get ready for Monica-Bill redux
The Media gorging, raking mucks
Oozing glee from all their ducts
Republicans full of tuts and clucks
Leno and Letterman will use it for yucks
Tabloids making beaucoup bucks
As pundits narrate the jives and shucks
Of another Democratic Boy Wonder Deluxe
Who squandered the world for a few cheap...dates.

Good stuff, Jmay!

Bloomberg & ABC TV Says Spitzer Resigning

Monday, March 10, 2008 | 03:13 PM

in Legal

Both ABC and Bloomberg TV, citing sources, said Spitzer was going to announce his resignation as Governor of NY.

Briefing.com had previously cited Fox News that Spitzer was indicted by Federal Court in NY. Briefing.com: NY's Spitzer expected to resign - WABC TV [Read More]

~~~

Wall Street will be besides itself in an orgy of schadenfreude . . .

Update: March 10, 2008 3:45pm

Briefing update:

Court document in NY Prostitution case is not an indictment; document in NY case doesn't name Spitzer, according to Fox Reporter - DJ

Excerpt from ABC:

Sources tell Eyewitness News that Governor Eliot Spitzer is going to resign, after being linked to a prostitution ring in a published report.

Spitzer officials wouldn't immediately comment on the story. Spitzer, 48, is married and has three daughters.

Details about the prostitution ring were not immediately clear, but last week federal prosecutors in Manhattan filed conspiracy charges against four people accusing them of running a prostitution ring that charged wealthy clients in Europe and the U.S. thousands of dollars for prostitutes.

The Times reported that a person with knowledge of the governor's role believes the governor is identified as a client in court papers.

The Web site of the Emperors Club VIP displays photographs of the prostitutes' bodies, with their faces hidden, along with hourly rates depending on whether the prostitutes were rated with one diamond, the lowest ranking, or seven diamonds, the highest. The most highly ranked prostitutes cost $5,500 an hour, prosecutors said.

Spitzer has built his political legacy on rooting out corruption. He made headlines battling Wall Street while serving as attorney general. He won an historic share of the vote for governor in 2006, and took office vowing to continue his no-nonsense approach to fixing one of the nation's worst governments.

Who Painted Ambac's Tape?

Monday, March 10, 2008 | 07:30 AM

in Derivatives | Legal | Trading

Have a look at this run of transactions in the stock of Ambac (ABK) on Friday:

Source: Bloomberg Data Services

>
Here's why this is filed under category "Legal" -- who on earth is painting the tape at 4:05pm more than 25% over the last price?

Note that this was the day of the $1.5 Billion share offering . . .

Thanks, Scott!

~~~

UPDATE: March 10 2008, 11:00 am

My head trader tells me that there was a huge market-on-close buy imbalance, and there were attempts to find sellers at $8.00 - 8.50, and $9.00. No sellers appeared until $9.50, and the specialist went out short ABK for the weekend.

Friday afternoon (3:40pm), the specialist posted a Market on Close Imbalance to Buy 8.1million shares; at 3:50, that was down to 6.7million shares.

None of the institutions were around to hit that bid at $9 ?

Current price: $7.15

FBI Investigating Countrywide

Saturday, March 08, 2008 | 07:26 AM

in Credit | Derivatives | Legal | Real Estate

Why am I not at all surprised about this?

"The Federal Bureau of Investigation is probing subprime lender Countrywide Financial Corp. for possible securities fraud, according to law-enforcement officials and finance-industry executives.

The inquiry involves whether company officials made misrepresentations about the company's financial position and the quality of its mortgage loans in securities filings, four people with knowledge of the matter said. It is at an early stage, they emphasized. . .

Fifteen other subprime companies also are under scrutiny by federal agents and prosecutors in a broad look at the subprime industry sparked by huge losses on residential mortgages and the securities used to fund them. The investigations are examining mortgage-origination fraud, conflicts of interest and undisclosed relationships within the industry, and the practices used to package mortgage-backed securities for sale to investors.

Countrywide issued more than $100 billion in mortgage-backed securities between 2004 and 2007, according to the newsletter Asset Backed Alert. More than two dozen Wall Street firms helped construct those deals, making it possible that some of them will also face law-enforcement scrutiny."

I suspect we shall be learning alot more about Angelo Mozilo's stewardship, as well as those giant and well-timed stock sales. Someone is gonna be in a heckuva lot-o-trouble . . .

Source:
FBI Investigates Countrywide
U.S. Scrutinizes Filings On Financial Strength, Loan Quality for Fraud
GLENN R. SIMPSON and EVAN PEREZ
WSJ, March 8, 2008; Page A3
http://online.wsj.com/article/SB120494626642521739.html

~~~

Bankruptcy & Countrywide

Wednesday, March 05, 2008 | 07:00 AM

in Consumer Spending | Legal | Real Estate | Taxes and Policy

A quick post before I head over to CNBC: Two NYT articles caught my eye this morning on the theme of consumer bankruptcy:

• Filings for Bankruptcy Up 18% in February http://www.nytimes.com/2008/03/05/business/05bankruptcy.html

Americans filed for bankruptcy in growing numbers in February, buckling under the combined weight of rising energy prices, a weakening housing market and sky-high personal debts.

An average of 3,960 bankruptcy petitions were filed per day nationwide last month, up 18 percent from January and up 28 percent from a year earlier, according to Automated Access to Court Electronic Records, a bankruptcy data and management company.

That piece must be combined with the following:

• Countrywide Is Sued Again by U.S. Overseer http://www.nytimes.com/2008/03/05/business/05lend.html

The United States Trustee has filed a second lawsuit against the mortgage lender Countrywide Financial, accusing the company of abusing the bankruptcy process.

In a complaint filed Saturday with the Federal Bankruptcy Court in Miami, the United States Trustee for the Southwest region, Donald Walton, accused Countrywide Home Loans, a unit of the mortgage lender, of wrongly asserting claims related to the property of two Miami borrowers, Jose and Fanny Sanchez, who reorganized their finances in bankruptcy.

The Miami suit comes on the heels of a separate lawsuit in the bankruptcy court in Atlanta also accusing Countrywide of abusing the bankruptcy process.

That new bankruptcy law turned out to be quite a clever stroke of social engineering in ways never envisioned by its drafters . . .

Sources:
Filings for Bankruptcy Up 18% in February
JENNY ANDERSON
NYT, March 5, 2008
http://www.nytimes.com/2008/03/05/business/05bankruptcy.html

Countrywide Is Sued Again by U.S. Overseer
REUTERS, March 5, 2008
http://www.nytimes.com/2008/03/05/business/05lend.html

Real Estate, Speculation & "Occupancy Fraud"

Wednesday, February 06, 2008 | 01:58 PM

in Credit | Legal | Psychology/Sentiment | Real Estate

Today's WSJ had a run of Real Estate related articles that quite frankly, were rather surprising in their gentle naiveté.

The first is the somewhat surprised acknowledgment that speculators were involved in the run up and subsequent deflation of Housing prices.

Of course, every asset class attracts speculators when prices rapidly rise. Its why every big boom ends in a final blow off top -- that's the impact of late-to-the-party speculators -- followed by the inevitable spectacular collapse.

The latest after-the-fact revision (see our discussion on "predatory borrowing") has a new name: occupancy fraud.

This new nonsense word is a way to duck responsibility for failing to do appropriate due diligence prior to lending out money. Here are the details:

"As lenders pore over their defaulted mortgages, they are learning that the number of people who bought homes as investments is much greater than previously believed. Such borrowers turn up frequently in analyses of loans that defaulted within months after origination. In many cases, these speculators lied on loan applications, saying they intended to live in the homes in order to obtain more favorable loan terms or failed to provide the requested information.

Roughly 20% of mortgage fraud involved "occupancy fraud," or borrowers falsely claiming they intended to live in a property, according to an analysis by BasePoint Analytics, a provider of fraud-detection solutions in Carlsbad, Calif. Another study, by Fitch Ratings, looked at 45 subprime loans that defaulted within the first 12 months even though the borrowers had good credit scores. In two-thirds of the cases, borrowers said they intended to live in the property but never moved in."

Speaking of fraud -- I am curious about these lenders, now claiming they were defrauded by speculators. How many of them asked the following questions, and then did the due diligence to verify the data:

- Do you presently own your primary residence?
- Is your home currently listed for sale? Or, are you in contract ?
- What is the asking price? Who is your real estate agency?
- RE Agent name? What's their phone number?

Of course, none of these questions were asked, and no due diligence was performed, as these lenders were ~~whoring~~ clerking out loans as fast as they could process them. After the fact, this lack of due dilly has become "Occupancy Fraud."

If there was any genuine interest in not lending to speculators, its easy enough to verify . . .

Continue reading "Real Estate, Speculation & "Occupancy Fraud""

Moodys Warning Labels (sub-prime version)

Wednesday, February 06, 2008 | 07:30 AM

in Corporate Management | Credit | Derivatives | Legal

From Tuesday's WSJ:

"In an acknowledgment that the system it used to rate billions of dollars of mortgage-related securities was potentially flawed, Moody's Corp. said it is considering a new way of rating those and other sometimes-volatile structured finance vehicles.

The credit-rating firm is considering an overhaul of its rating procedures that could include new labels to help investors distinguish collateralized debt obligations and other structured-finance investments from corporate bonds and Treasury securities. . .

More broadly, the ratings firm is trying to decide whether to add warning labels that essentially acknowledge the limitations of its ratings."

>
Let me make sure I understand this:

1. Moodys (and S&P and Fitch's) labelled a bunch of horrific junk -- RMBS, CDOs, CDS, and other stuff -- high quality AAA.

2. The banks and brokers all shoveled this crap to their clients around the world, many of whom then promptly blew up.

3. Once the music stopped, these banks and brokers got caught holding loads of this AAA rated ~~shit~~ paper, leading to $130 billion -- and counting -- in write downs.

4. The banks then saw their credit ratings get downgraded by the same companies that rated the original crappy paper AAA.

AND NOW THE SOLUTION PROPOSED BY THOSE SELF SAME RATING AGENCIES IS TO PUT A WARNING LABEL ON THEIR RATINGS?

Are you shitting me? Words fail me . . .

I'm thinking waterboarding the entire staff is the way to go with these criminal idiots, and instead, they think a mattress tag is a solution?

Well that's just fine. I'll write the warning for them:

WARNING: THESE BONDS HAVE BEEN RATED AAA BY A MAJOR RATING FIRM. THESE RATING FIRMS HAVE PROVEN THEMSELVES TO BE CLUELESS, MONEY-LOSING INCOMPETENTS IN EXCESS OF A TRILLION DOLLARS IN LOSSES. THEY WERE PAID HANDSOMELY BY THE BOND UNDERWRITER, AND ARE HOPELESSLY COMPROMISED. PURCHASERS OF THESE BONDS ARE ADVISED TO IMMEDIATELY KILL THEMSELVES, THUS SPARING THEIR LOVED ONES EMBARRASSMENT IN THE FUTURE. ALSO, THESE BONDS MAY LOSE VALUE. I JUST WET MYSELF MERELY THINKING ABOUT THIS PAPER. WHILE PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RETURNS, YOU SHOULD BE AWARE THAT PAST PERFORMANCE ALSO SUCKED. DONT BLAME US IF YOU LOSE ANY MONEY, AS WE HAVE NO IDEA WHAT THE F$#@ WE ARE DOING ANYWAY. REALLY, YOU ARE ON YOUR OWN.

Now thats a disclosure . . .

Source:
Moody's Weighs Warning Labels For Its Rating
AARON LUCCHETTI
WSJ, February 5, 2008; Page C1
http://online.wsj.com/article/SB120215330254641705.html

Truth-in-Lending Disclosure Failure Leads to Mortgage becoming "UnSecured"

Wednesday, August 22, 2007 | 06:01 AM

in Credit | Federal Reserve | Legal | Real Estate

Every now and again, a potentially significant story manages to slip through the cracks, barely noticed by anyone. A recent Dow Jones article by Jilian Mincer -- "Mtge Lawsuits Could Bail Out Some Borrowers" -- is just such an article. The only reason I even knew about it was because I spoke with the reporter and was quoted in it.

It is a fascinating tale that I suspect won't be ignored for long. For those few people familiar with the Federal Truth-in-Lending Act (TILA), this won't be much of a surprise. To everyone else, read on.

What happens if a lender fails to comply with the TILA rules? The boList Postsrrowers are allowed to RESCIND THE LOANS AND VOID THE MORTGAGES ON THEIR HOMES. The mortgage lender is then just another unsecured creditor, who must get in line behind everyone else who may have filed a lien on the property. Who ever files first (Credit card, auto finance, doctors, etc.) has first priority.

That makes the mortgage loan itself unsecured -- and worth a lot less -- due to the increased risk of loss of collateral:

"Some consumers burdened by escalating subprime mortgage payments are finding a way out. A growing number are suing lenders over inaccurate disclosure papers, and if they win they get to rescind the loans.

While that's good news for individuals, it's a potential problem for investors exposed to subprime mortgages. These investors, already buffeted by the subprime mortgage meltdown, are facing a new risk - the mortgages supporting some of their investments may not be enforceable because of violations of state and federal consumer protection laws.

It's not clear yet how widespread or successful these lawsuits may become. "Depending on how widespread, this could be a minor bump in the road or this could be a very significant factor," says Barry Ritholtz, chief market strategist at Ritholtz Research & Analytics.

The subprime market has been known for its lax standards in documentation and the proliferation of these loans in recent years is now fueling significantly more complaints. The subprime share of first mortgages rose to 13.4% in the first quarter of 2007 from 10.9% in the first quarter of 2004."

Let me put on my lawyer hat for a moment: The Truth-in-Lending Act requires "clear and conspicuous" disclosure to borrowers of the key provisions of their mortgages. This includes such details as the eventually reset interest rate, specific loan terms, and the total dollar amount the mortgage will cost over time:

§ 129. Requirements for certain mortgages

(1) SPECIFIC DISCLOSURES.--In addition to other disclosures required under this title, for each mortgage referred to in section 103(aa), the creditor shall provide the following disclosures in conspicuous type size:
(2) ANNUAL PERCENTAGE RATE.--In addition to the disclosures required under paragraph (1), the creditor shall disclose
(A) in the case of a credit transaction with a fixed rate of interest, the annual percentage rate and the amount of the regular monthly payment; or

(B) in the case of any other credit transaction, the annual percentage rate of the loan, the amount of the regular monthly payment, a statement that the interest rate and monthly payment may increase, and the amount of the maximum monthly payment, based on the maximum interest rate allowed pursuant to section 1204 of the Competitive Equality Banking Act of 1987.
(emphasis added)

This seems to be where many of the subprime 2/28 ARMs ran afoul: They failed to meet the disclosure laws regarding actual interest amounts and payments.

Who has gotten tagged with these cases so far? Subprime lender NovaStar Financial Inc. (NFI) in Kansas City settled a class action suit for $5.1 million. And, consumers in Wisconsin recently won a class-action TILA suit (its under appeal).

Between 1998 and 2006, approximately 2.2 million (nominal) home owners with subprime loans are expected to lose their homes, according to the Center for Responsible Lending. The consumers in this group who a) could not afford those loans and b) did not receive the proper disclosures are "talking with lawyers in an effort to prevent foreclosures."

~~~

Anyone who has worked in a corporate environment has used or heard the phrase "Send it to Legal," or "What did Legal say about that?" Of course, "Legal" being the internal corporate legal department.

Didn't the legal departments of the mortgage underwriters prepare these loan forms? Aren't these standardized? WTF did the various legal departments involved actually do, other than go to lunch and wear ugly ties ?

Astounding!

And, here's the real rub: This kinda makes you wonder what sort of due diligence the secondary market actually did on these basic non-compliant loan errors in the sub-prime market. How about the CDO banking underwriters -- didn't their Legal review these docs for compliance with existing laws prior to purchasing trillions of dollars worth of the stuff? Was their fraud involvd, or did these guys just miss it?

This is basic stuff, and its amazing that in the headlong rush to write these garbage loans, no one caught very basic, banking 101 type rule.

It just shows how little oversight by the regulators there was in this space. Hard to imagine, but the Central Bankers either never reviewed these loan documents, or never caught these basic disclosure errors.

And yes, I place some of the blame on the Greenspan Federal Reserve -- they were the regulatory authority in charge of bank mortgage lending when these junk mortgages were written . . .

Source:
Mtge Lawsuits Could Bail Out Some Borrowers
Jilian Mincer
Dow Jones Newswires Column, 7/16/2007 7:31 AM
Newswire only

CONSUMER CREDIT PROTECTION ACT
15 U.S.C. 1601 note]
May 29, 1968 (Pub. L. No. 90--321; 82 Stat. 146)
http://www.fdic.gov/regulations/laws/rules/6500-200.html