Comments on: Regulators have known about the mortgage bond scandal for three years A slice of lime in the soda Sun, 26 Oct 2014 19:05:02 +0000 hourly 1 By: Danny_Black Mon, 01 Nov 2010 13:40:32 +0000 mattski, first of all this was demand driven by the buyside. Secondly, of all the players involved the buyside are the ones who have a clear cut fiduciary responsibility to due proper due diligence not the sellside. They are the ones who get paid to do exactly that.

By: mattski Mon, 18 Oct 2010 12:10:00 +0000 Danny Black: “not really a conspiracy more just incentives”

Sure, but incentives (misaligned) result in moral hazard and/or corruption, simply put. And to an outsider the entire system looks corrupt if it succumbs to this sort of event. Which it did!

Btw, when you say the asset managers were the “root cause of the crisis” I think that you’re going too far. What makes them especially culpable, more so than the originators of the assets who evidently were selective in their disclosure of info? I take your point that the asset managers are culpable. I think misaligned incentives really means that *anyone* with an incentive to perpetuate this kind of nonsense is also culpable.

By: Danny_Black Mon, 18 Oct 2010 07:56:05 +0000 MichelDelving, boldly apparent? Name one then. Post the prospectus and the proof the underlying loans were known by the banks to be fraudulent.

The incentives are the same for all servicers. In a falling market they LOSE money on foreclosures and they are out of pocket for up to three years before they see a dime. The article you quoted is confusing servicers with lawyers, who most certainly ARE making money out of this – and with the current “scandal” seem certain to make more.

PS as a buysider why are you scrutinzing CDO reference collateral now? As opposed to say three years ago?

By: MichelDelving Sun, 17 Oct 2010 17:48:44 +0000 Danny_Black ~

There is much insight to be taken in knowing exactly how servicers are rated.

“Speed is also rewarded by the nation’s credit-rating agencies, which give higher grades to mortgage service firms that accelerate the foreclosure process and generally hand out lower grades to those who hold onto delinquent loans. A Fitch Ratings manual calls the speed of foreclosures “the key driver in the servicer rating,” according to a report by the National Consumer Law Center.”
For Foreclosure Processors Hired by Mortgage Lenders, Speed Equaled Money tent/article/2010/10/15/AR2010101506541. html

In scrutinizing CDO reference collateral and ABX reference entities, it is boldly apparent that certain tranches were targeted for mortgage servicing fraud, knowing that it takes a relatively small percentage of defaults to tank a security. Sure there were many tranches in which complicit servicers did not exact servicing fraud. They didn’t need to. Given the now vast volume of case law, depositions, decisions and settlements, clearly there are few servicers who did not participate in the scheme. When lenders or credit unions portfolio and service loans in house, chances are you are fairly safe from predatory servicing.

By: Danny_Black Sun, 17 Oct 2010 02:15:46 +0000 MichelDelving, I am sure they also service the mortgages underlying successful ones too. Not that many servicers out there as it was a “economies of scale” business.

By: Danny_Black Sun, 17 Oct 2010 02:14:03 +0000 mattski, not really a conspiracy more just incentives. Most asset managers get paid by assets under management. How do they attract more assets? By chasing yield. Alot of these asset managers have regulatory constraints on what they can invest, most typically around credit risk. So what they are motivated to do is to take other risks instead because we seem to have been conditioned that if there is no credit risk then it is “safe”.

The banks manufactured these products because the asset managers wanted them. One of the things that got missed somehow is that during the boom, that there was so much demand from asset managers that the originating banks simply couldn’t issue enough debt to service that demand. I think the simple answer to Felix’s question about the due diligence is that most investors simply didn’t care. They cared about yield, they wanted a stamp saying it was “safe” and possibly some relative value input. It still amazes me that these people have somehow become the “victims” when they frankly are the root cause of the crisis and to again to reiterate they are the ones who most certainly DO have a fiduciary responsibility.

If I might add to the used car salesman analogy. You can argue about whether the salesman had a requirement to disclose everything or not but if you hire a guy to go out and get you the best deal based on his claim of expertise in this exact field then I think he DOES have a responsibility for what you buy.

By: mattski Sat, 16 Oct 2010 22:46:51 +0000 KD: “Customers wanted yield that was approved by the ratings agencies. That’s what they got.”

Certainly a whiff of a (loosely organized) conspiracy there!

I’d sure love to see Felix, or perhaps Steve Waldman, weigh in again in comments.

By: MichelDelving Sat, 16 Oct 2010 20:43:23 +0000 With all the current focus on organized and systematic manufacturing of falsified documents to deprive people of their homes, we must keep in mind that this is all a coverup for the real engine that drove the scheme – mortgage servicing fraud. Robo signers are just papering over bogus manufactured defaults which servicers were expert in fabricating in order to feed CDS casinos. Let’s also not forget who owns and controls most of the servicers – large investment banks whose prop trading desks savagely shorted subprime while complicit subsidiary servicers generated ‘credit events’ to ensure winning bets. Dissect any tanked CDO or look closely at ABX reference entities and you will see servicers with long rap sheets for servicing fraud, not only on all levels of the judicial system but in impotent Federal actions as well.

2010 – Countrywide Home Loans Servicing – now owned by BoA – ywide.shtm
2008 – EMC Mortgage Corp. – formerly Bear Stearns subsidiary, now JPMC –
2003 & 2007 – Select Portfolio Servicing – Credit Suisse subsidiary
2004 – Ocwen Federal Bank – http:/

It is no accident that time after time CDO prospectuses read “Credit risk arises from losses due to defaults by the borrowers in the underlying collateral or the issuer’s or SERVICER’S FAILURE TO PERFORM.” At the same time ratings agencies persisted in giving servicers sterling ratings without so much as a glance to relevant, readily available legal decisions and settlements. Despite these facts being in public view for years now, MSM has perpetrated the myth of deadbeat borrowers being the cause of this debacle. Only recently are some beginning to see the light and report the truth, acknowledging that servicers loaded the dice so investment banks and “speculators” could reap the benefit of their “sure bets”. When it all comes out, this will become known as the largest, most damaging insider trading scheme in all history.

L. Randall Wray, Professor of Economics at the University of Missouri-Kansas City puts it more strongly:
“This is the biggest scandal in human history. Indeed, all previous scandals from around the globe combined cannot even touch this one in terms of scale and scope and stench. This is the mother of all frauds and it will be etched into the history books for all time.” bank-holiday-is-best-solution-for-epidem ic-of-mortgage-fraud.html#ixzz12YWiGlt6

By: McGriffen Sat, 16 Oct 2010 18:55:10 +0000 It’s entertaining to think back, with a few keystrokes I might have purchased FNMA 15yr or 30yr 6.0% bonds. Bingo, problem solved. FNM and FRE receive capital infusion, and the FED is adding a hefty bid into that market. However, still exposed to a levered debt security issued via the US mortgage finance chicanery.

DUE Diligence: know the structural features of securitization 101 for private label MBS. AAA investors are at the front of the class, both in regards to interest and ultimate principal. AAA investors, by their nature, are supposedly gonna be risk-averse than a typical A/BBB investor. The credit enhancement structure on most private label MBS are fairly straight-forward. Excess spread, starting OC balances, and then the credit structure.

AAA classes are not ‘guaranteed’ of anything; but a starting CE % of 18-25% previously provided a better level of comfort, as opposed to the BBB class facing high losses with a CE% of 2-5%. AAA classes are the last class of investors to face potential loss of principal.

Rating migration: what the hell is this, now? It’s a long run study, performed on structured finance ABS, that proved over a 15-18 year period how stable AA/AAA ratings had performed over that time frame. Those results had maintained some historical signifance until late 2006/2007 & onward. Moving downward in the capital structure, it’s intuitive that classes rated “A” and lower experience greater “noise” in downgrade activity.

Default scenario assumptions: prior to the housing / mortgage finance implosion, it was commonly understood that a homeowner would choose to default on the mortgage loan as the last option. Credit cards, and automobile obligations, were typically presumed to be first out the door in terms of borrower default; easier to dismiss those, and/or settle, through a personal bankruptcy filing.

Credit curing: another previously held conceit, that an average “640 borrower” could improve one’s credit status after meeting contracted mortgage payments 18-24 months in a row. A fully documented loan also aided greatly in this regards.

I can probably add more as they derive into my noggin

By: Danny_Black Sat, 16 Oct 2010 17:13:49 +0000 Just remember what this “scandal” reminds me of… the always classic Homer Badman, in particular:

{[changes channels to Sally Jesse Raphael]}
Woman: {[weeping] I don’t know Homer Simpson, I — I never met Homer
Simpson or had any contact with him, but — [cries
uncontrollably] — I’m sorry, I can’t go on.}
Sally: {That’s OK: your tears say more than real evidence _ever_