This document summarizes Barry Ritholtz's presentation on how systemic bank fraud contributed to the financial crisis. The presentation argues that lenders engaged in widespread origination fraud by ignoring underwriting standards and promoting risky loan products like stated income loans. This led to a credit bubble as mortgage debt increased dramatically. When housing prices declined, it resulted in a high rate of defaults and foreclosures, contributing significantly to the financial crisis. The document examines the role of practices like MERS and robosigning in obscuring ownership of mortgages and subverting the legal process during foreclosures.
This document summarizes Barry Ritholtz's presentation on how systemic bank fraud contributed to the financial crisis. The presentation argues that lenders engaged in widespread origination fraud by ignoring underwriting standards and promoting risky loan products like stated income loans. This led to a credit bubble as mortgage debt increased dramatically. When housing prices declined, it resulted in a high rate of defaults and foreclosures, contributing significantly to the financial crisis. The document examines the role of practices like MERS and robosigning in obscuring ownership of mortgages and subverting the legal process during foreclosures.
This document summarizes Barry Ritholtz's presentation on how systemic bank fraud contributed to the financial crisis. The presentation argues that lenders engaged in widespread origination fraud by ignoring underwriting standards and promoting risky loan products like stated income loans. This led to a credit bubble as mortgage debt increased dramatically. When housing prices declined, it resulted in a high rate of defaults and foreclosures, contributing significantly to the financial crisis. The document examines the role of practices like MERS and robosigning in obscuring ownership of mortgages and subverting the legal process during foreclosures.
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