Follow the Money: How Systemic Bank Fraud

Contributed to the Financial Crisis

Barry Ritholtz
The National Association of Attorneys General
Presidential Initiative Summit
America's Financial Recovery: Protecting Consumers as We Rebuild
April 11-12, 2011
The Westin Hotel
Charlotte, NC
Bad Decision Making + Systemic Fraud = Financial Crisis
Todays presentation:
Questions About the Crisis: Follow the Money
What was Origination fraud?
Who profited from the legal shortcuts?
Where are the conflicts of interest?
Can you Mass Produce mortgages/foreclosures?
What are the ongoing bank frauds?
How many false affidavits have been filed in courts all
over the country?
How is your own state doing?
Federal action vs State AG Investigation
Fed Funds Rate, 1954-2006
Federal Funds Rate 2000-06
Source: Ritholtz.com, Calculated Risk
Living Standards = Flat Wages + Home Equity
Source: Ritholtz.com, Calculated Risk
Total Credit Market Debt/GDP
(Quarterly Data 1946 - 2009)
Source: NDR, Crestmont Research, Ritholtz.com
Home mortgage loans increased from 16% of GDP in 1952 to 66% of GDP in 2003
The civilian work force increased by 30% in the 1970's (2X any other decade) providing
partial foundation for borrowing surge.
Asset-backed debt (i.e., mortgages) has a different implication for the economy than
income-supported debt (i.e., credit cards.
On a real basis, adjusting for inflation, the rate of growth has been relatively constant
over the past 50 years.
The Credit
Bubble and
Housing
Booms
Shaky
Foundation
A Brief History of Commercial Credit
Origination Fraud: Lenders Get Creative
Compared to 30 Year Fixed Mortgage
1. 2/28 ARMs
2. Interest Only
3. Stated Income Loans (No doc)
4. Piggyback Mortgages (1
st
plus 2
nd
)
5. Negative Amortization Loans
6. Payment Option
7. No money down (100% LTV)
8. NINJA (No Income, No Job, No Assets)
Source: Bailout Nation
The business of banks is identifying good lending risks
. . . Or was it ?
Origination Fraud: Why Did Lenders Accept Stated Income Loans?
Source: HousingStory.Net
Eliminate the verification of income for a mortgage
borrower, and you eliminate your ability to predict the
likelihood of repayment or default.
-Michael White, CountryWide Subprime Unit
2004: FBI Warns Rampant Mortgage
Fraud Reaching Epidemic Proportions
Rampant fraud in the mortgage industry has increased so sharply that
the FBI warned Friday of an "epidemic" of financial crimes which, if not
curtailed, could become "the next S&L crisis."
Assistant FBI Director Chris Swecker said the booming mortgage market,
fueled by low interest rates and soaring home values, has attracted
unscrupulous professionals and criminal groups whose fraudulent activities
could cause multibillion-dollar losses to financial institutions.
"It has the potential to be an epidemic," said Swecker, who heads the
Criminal Division at FBI headquarters in Washington. "We think we can
prevent a problem that could have as much impact as the S&L crisis," he
said. -CNN
Source: CNN
Lend-to-Sell-to-Securitizers Model Systemized Fraud
How did two $15k strawberry pickers qualify for $750k mortgage?
What Were the Warranties of Sold Mortgages
Source: Bill Black, The Best Way to Rob a Bank is to Own One
How Fraud led to a Credit Bubble
1. Traditional underwriting standards ignored
2. Extreme growth in hot areas vs. core business
3. Automation of traditional human judgment (Zippy)
4. Extreme leverage
5. Insufficient Loss Reserves
6. Little Retention of Loan
7. Extreme compensation of Sales People and Management
Source: Ritholtz.com, RAB Capital
Excess Mortgage Debt
1990: $6 trillion of housing collateral could support $2.5 trillion of mortgages
2006: $23 trillion of housing collateral could support $10 trillion of mortgages
2010: $16 trillion of housing collateral could support $6 trillion of mortgages.
Problem is, mortgage debt has remained at $10 trillion $4 trillion too high.
Source: Ritholtz.com, RAB Capital
US Homebuilders Construction Binge
2002 and 2006: 12 million new homes built
New Households = 7 million.
5 Million excess homes are a massive oversupply
relative to the number of households.
Source: Ritholtz.com, RAB Capital
US Homebuilders Construction Binge
4 Million excess homes = 2010
Household formation = 0.9 million / year
Homes built = 0.6 million /year
Current rate = 12 years to absorb excess
Source: Ritholtz.com, NDR
Residential Real Estate
Relative to Median Income, Rent
Follow the Money:
Emphasis on Speed & Cheapness (Dubious Legality be
damned!)
1. MERS
2. Mortgage Pools (Warranties & Reps)
3. Bad Securitization (Quality)
4. Misplaced Mortgage Notes
5. Force-Placed Insurance
6. Illegal Pyramid Servicing Fees
7. Document Fraud for Sale
8. False Affidavits, Perjury (Robo-Signing)
9. Foreclosure Mills, Process servers exasperate problem
10. Active Servicemen losing homes while on tour of duty
Follow the Money: MERS
1. Legal Fiction created by banks without authority or enabling legislation
2. MERS helped banks circumvent mortgage filing fee requirements
3. No fees = made mass-securitization of mortgages financially feasible
4. Allowed Notes/Mortgages to be shifted rapidly to multiple subsequent owners
5. Substantial percentage of MERS assignments were for entities that did not exist
6. Currently: Losing rulings 3-to-1 standing/right to foreclose (4.11.11 Salazar in California)
Follow the Money: Force-Placed Insurance
Evidence of abuses and self-dealing in the force-placed insurance industry suggests
that there may be far larger problems in how servicers are handling distressed loans
than the sloppy document recording that has been the recent focus of industry woes.
-American Banker, November 2010
UPDATE: New Questions about Banks' Force-Placed Insurance Deals
American Banker, April 12, 2011
Follow the Money: Servicing Errors and Fraud
When a payment is received past due, a late fee is assessed versus next months payment.
The borrower makes his regular payment, but instead of being applied to P&I, it goes
towards the fee. And since there is now a new shortfall, the borrower gets assessed an
insufficiency fee and a late fee. These fees pyramid.
Two late fees, and some pooling and servicing agreements require a broker price opinion
(BPO), typically about $250. Less than an appraisal, its a drive by photo shoot/price
guesstimate of what it might be worth.
Despite making all of their payments, out of the blue, this borrower gets a call from the
servicer, or worse, a foreclosure notice.
Source: nakedcapitalism.com; See also: Kurt Eggert Limiting Abuse and Opportunism by Mortgage Servicers
National Consumer Law Center: 50% of cases are servicer driven foreclosures.
Since when does delinquency inevitably = default?
Follow the Money: Document Fraud for Sale
Source: DOC X, Scribd.com;
Follow the Money: Bank Outsourcing to
Low Cost Legal Bidders Part of the Problem
Fannie Mae was warned in a 2006 internal report of abuses in the way
lenders and their law firms handled foreclosures, long before regulators
launched investigations into the mortgage industrys practices.
The report said foreclosure attorneys in Florida had routinely made false
statements in court in an effort to more quickly process foreclosures and
raised questions about whether some mortgage servicers or another entity
had the legal standing to foreclose.
Fannie Report Warned of Foreclosure Problems in 2006
WSJ, MARCH 25, 2011
Source: WSJ
Follow the Money: False Affidavits Suborning Perjury
When Stephan says in an affidavit that he has personal knowledge of the
facts stated in his affidavits, he doesnt.
When he says that he has custody and control of the loan documents, he
doesnt.
When he says that he is attaching a true and accurate copy of a note or a
mortgage, he has no idea if that is so, because he does not look at the
exhibits.
When he makes any other statement of fact, he has no idea if it is true.
When the notary says that Stephan appeared before him or her, he didnt.
-Thomas A. Cox, a retired lawyer, describes GMACs foreclosure process
Source: NY Times
Legally Impossible Foreclosures
Faith in key institutions Legal System, Banking, Government
is crucial for Capitalism to function.
Source: Ritholtz.com
Why Capitalism Works And Other Systems Fail:
In the West, this formal property system begins to process assets into capital by describing and
organizing the most economically and socially useful aspects about assets, preserving this
information in a recording systemas insertions in a written ledger or a blip on a computer disk
and then embodying it in a title. A set of detailed and precise legal rules governs this entire process.
Formal property records and titles thus represent our shared concept of what is economically
meaningful about any asset. They capture and organize all the relevant information required to
conceptualize the potential value of an asset and so allow us to control it . . .
The reason capitalism has triumphed in the West and sputtered in the rest of the world is because
most of the assets in Western nations have been integrated into one formal representational
system . . . By transforming people with real property interests into accountable individuals, formal
property created individuals from masses. People no longer needed to rely on neighborhood
relationships or make local arrangements to protect their rights to assets. They were thus freed to
explore how to generate surplus value from their own assets.
-Hernando de Soto, The Mystery of Capital
How is your own state doing?
Your state and local foreclosure market,
as seen through Google Maps
Welcome to Foreclosure Land
Source: Ritholtz.com
Using GoogleMaps to find foreclosures:
1. Punch your local address into Google Maps.
2. Your options are Earth, Satellite, Map, Traffic and . . . More. (Select More)
3. The drop down menu gives you a check box option for Real Estate.
4. The left column will give you several options (You may have to select Show Options)
5. Check the box marked Foreclosure.
Google Map Foreclosure Tricks
Source: Ritholtz.com
Lets zoom the map on to the state of Florida
(A state that knows a thing or two about bad real estate)
Then we can zoom closer to South Florida
(Thank goodness the Everglades stemmed the tide of foreclosures!)
Zoom a bit more . . . Welcome to Miami!
(Playground to wealthy S.Americans, Europeans, and other defaulters)
The National Foreclosure Steamroller Continues . . .
Lets Go Shopping . . . On Miami Beach!
(Im sure easy financing is still available)
A Quick Look at Detroit:
After I showed this Google trick online,
Jonathan Miller (who runs the RE
Appraisal firm Miller Matrix) noted his
wifes family came from Detroit, where the
map is nearly solid RED
The State Attorneys General
are the countrys best hope for:
1. Property Rights
2. Rule of Law
3. Due Process
4. Restoration of confidence
5. Justice . . . ?
Congress for Sale: 2009 Lobbying $3.49 Billion
Source: Ritholtz.com, Time
Derivative trading banks spent $28 M
to save $5-7 billion collateral allocations
$ = Annual profits $3 billion
(risk remains on the taxpayers)
Auto Dealers spent < $10M dollars
($6.3m lobbying, + $3.4m campaign
contributions)
$ = Saved undisclosed added interest, fee
kickbacks, other over-priced loans worth
$20 billion annually to dealers.
1. Panel to advise and recommend areas for investigation
2. Deep dive into illegalities: Investigate wrongdoing
3. Cannot settle until after extensive review of bank fraud, bad
actors, financial shortcuts, illegalities
4. Use your Subpoena Power
5. Find out Who gave the orders to ____ ?
6. Joint information clearing house amongst AGs regarding
bank fraud
7. Active Cooperation with Criminal Prosecutors
8. Educate public regarding Bank Fraud
9. Establish that Fraud does not pay
What can be done right now?
8arry L. 8lLholLz
CLC, ulrecLor of LqulLy 8esearch
luslon lC
333 llh Avenue, 23
Lh
oor
new ?ork, n? 10017
212-661-2022 x7104
316-669-0369
1he 8lg lcLure
hup://www.rlLholLz.com
for more information, contact