I mentioned this at the end of this post about investor lawsuits, but it deserves to be highlighted. This is a level of fraud that I probably should’ve seen coming, but didn’t. Apparently, Bank of America has admitted in a court filing that they sold the same mortgage loan in multiple pools to investors. In layman’s terms, say I own the FDL News Cupcake Food Truck and you come up to buy a cupcake. I sell it to you, and then I sell the same cupcake to the guy behind you, and the guy behind you. As you all wait for your order, you talk to each other and realize that you were all sold the same cupcake. So who actually owns it?
That’s directly from the court document, saying that many loans and other mortgage-related assets “have been double- and even triple-pledged to various constituencies.” It would be impossible to designate ownership in that scenario unless the trustees of the mortgage pools took back all the loans and assigned them again.
You’re talking about the same mortgage loan sold two or three times to different people. In the hustle to get as much paper out the door as possible, all kinds of fraudulent occurrences like this happened. An anonymous whistleblower at Zero Hedge basically corroborates this today:
This much I can tell you. We have no idea what is in those packages. I personally packaged billions in MBS which have been placed on public shelves. Those assets were underwritten by Goldman, Morgan or name your investment bank [...]
I put together a large subprime deal where we said that the percentage of Stated income assets was 10%. Out of a pool of over 500 assets, we ran our due diligence and pulled a sample of 50 assets, we had over 25% of the assets come back as stated income. Well, we got another 50 assets and still came back with 22% stated. It was obvious to me and the underwriter that the stated income levels were higher than originally reported.
How did we handle this issue? We threw all the stated income assets out of the deal. In this case we threw out 22 assets and packaged the deal as 10%. In fact that is how we would typically handle issues where we had discrepancies. I told my boss on several occasions that it was a real fishy way of doing things, but as everyone was also doing it, my coworkers, the guys from Goldman, the agencies, I just kind of went along with it [...]
We didn’t check every single loan document for every single legally required piece of information. Yea, we’d check for the important things, but we couldn’t and didn’t check for every single clause on every single loan document. We couldn’t. And now we are finding out that we should have.
This is basically the mortgage bond scandal that Felix Salmon, Shahien Nasiripour and others have been writing about. The banks would knowingly put garbage into the mortgage pools and trot it out to the investors while misrepresenting the product. Now, we’re learning, there was a whole new angle – some of the loans showed up in multiple pools.
And the database function which built the securitization market for speed instead is contributing to the legal problems. Floyd Norris took a look at MERS today and came to many of the same conclusions that I did.
Bank stocks fell sharply last week, even while most shares were rising. JPMorgan Chase, which is a part owner of MERS, said it had not used the service since 2008. At least one title insurance company has gotten a bank to agree to indemnify it if the securitization process causes problems for titles. Without title insurance, the real estate market would grind to a halt.
And earlier this month a federal judge in Oregon issued an injunction blocking Bank of America from foreclosing on a borrower’s home. United States District Court Judge Garr M. King said that under Oregon law, the borrower was likely to prevail on the argument that the use of MERS had invalidated the mortgage [...]
In a case in Arkansas, the owner of a second mortgage foreclosed on a home without notifying MERS, which was listed as owning the first mortgage. When MERS sued to overturn the foreclosure, the state supreme court ruled that MERS had no case. It had lost nothing, the court concluded, because it was not the actual beneficiary of the first mortgage.
I see no way out of this for the banks. Investors are getting wise that they’ve been defrauded, they have legal avenues to seek restitution, and unlike homeowners they are rich enough to get recognized by a legal system that caters to some more than others.
UPDATE: Atrios is right that we don’t have a sense of how widespread this particular problem is. But it does show that there were practically no safeguards to this kind of occurrence, that MERS did not streamline the securitization process in such a way to avoid mistakes, and that just presages more problems.