LET THE PROSECUTING BEGIN- WHY IS THE GOVERNMENT WAITING?

UPDATE MAY 16, 2011-  FOR THE FULL STORY AND VIDEOS GO TO- http://takeyourhomeback.com/?p=506

WASHINGTON — A set of confidential federal audits accuse the nation’s five largest mortgage companies of defrauding taxpayers in their handling of foreclosures on homes purchased with government-backed loans, four officials briefed on the findings told The Huffington Post.

The five separate investigations were conducted by the Department of Housing and Urban Development’s inspector general and examined Bank of America, JPMorgan Chase, Wells Fargo, Citigroup and Ally Financial, the sources said.

The audits accuse the five major lenders of violating the False Claims Act, a Civil War-era law crafted as a weapon against firms that swindle the government. The audits were completed between February and March, the sources said. The internal watchdog office at HUD referred its findings to the Department of Justice, which must now decide whether to file charges.

The federal audits mark the latest fallout from the national foreclosure crisis that followed the end of a long-running housing bubble. Amid reports last year that many large lenders improperly accelerated foreclosure proceedings by failing to amass required paperwork, the federal agencies launched their own probes.

The resulting reports read like veritable indictments of major lenders, the sources said. State officials are now wielding the documents as leverage in their ongoing talks with mortgage companies aimed at forcing the firms to agree to pay fines to resolve allegations of routine violations in their handling of foreclosures.

The audits conclude that the banks effectively cheated taxpayers by presenting the Federal Housing Administration with false claims: They filed for federal reimbursement on foreclosed homes that sold for less than the outstanding loan balance using defective and faulty documents.

Two of the firms, including Bank of America, refused to cooperate with the investigations, according to the sources. The audit on Bank of America finds that the company — the nation’s largest handler of home loans — failed to correct faulty foreclosure practices even after imposing a moratorium that lifted last October. Back then, the bank said it was resuming foreclosures, having satisfied itself that prior problems had been solved.

UPDATE MAY 6, 2011-

J.P. Morgan/Chase received a subpoena from the U.S. Securities and Exchange Commission over failed mortgages, a person familiar with the investigation said, as the agency probes banks including Credit Suisse Group AG (CS) for allegedly failing to share refunds from sellers of faulty debt.

Credit Suisse received a subpoena from the SEC last week, bond insurer MBIA Insurance Corp. said in a filing yesterday in a lawsuit against three of that Zurich-based bank’s units. The agency asked New York-based JPMorgan for information after a court in January unsealed allegations made about Bear Stearns Cos.’ practices in another suit, said the person, who declined to be identified because the matter isn’t public.

U.S. investigators have been scrutinizing companies involved in the mortgage business after the worst collapse in home prices since the Great Depression.

Bond insurers MBIA and Ambac Assurance Corp. have said Credit Suisse and Bear Stearns, which JPMorgan bought in 2008, demanded refunds from originators that sold the banks the loans that they packaged into bonds, and then failed to use those settlement amounts to fulfill their own contractual promises on the debt.

“We’re really starting to finally get into evidence that suggests blatant fraud,” said Isaac Gradman, a San Francisco- based litigation consultant and formerly a lawyer at Howard Rice Nemerovski Canady Falk & Rabkin.

Seeking Documents

Jennifer R. Zuccarelli, a spokeswoman for New York-based JPMorgan, declined to comment. Steven Vames, a Credit Suisse spokesman in New York, declined to comment on MBIA’s statement about an SEC investigation. John Nester, an SEC spokesman, declined to comment.

Kevin Brown, a spokesman for MBIA, said that Patterson Belknap Webb & Tyler LLP as counsel for the bond insurer was also subpoenaed by the SEC, seeking documents related to the Credit Suisse matter.

U.S. agencies have been seeking evidence of wrongdoing across the mortgage industry from before the market collapsed in 2007. JPMorgan said in a regulatory filing today it’s in “advanced discussions” with the SEC to resolve an investigation into collateralized debt obligations, which package assets such as mortgage bonds into new securities.

The Justice Department sued Deutsche Bank AG this week for more than $1 billion, saying the firm lied about its process for checking the quality of loans granted federal insurance.

Charlotte Stripper

Credit Suisse knowingly packaged bad loans into bonds, MBIA said in a court filing. The insurer included an exhibit in its suit composed of e-mails related to a “stated income” loan sought by a stripper in Charlotte, North Carolina, whose reported monthly pay of $12,000 was questioned by some bank employees.

MBIA Insurance Corp., the bond insurance unit of Armonk, New York-based MBIA Inc. (MBI), disclosed Credit Suisse’s SEC subpoena and the exhibit in a filing in New York State Supreme Court. The document, dated April 29, was filed yesterday.

“Credit Suisse is now the subject of an investigation by the Securities and Exchange Commission, which issued a subpoena this week seeking the same types of documents as MBIA seeks,” the insurer said.

MBIA alleges in its lawsuit that Credit Suisse failed to repurchase soured mortgages out of a 2007 securitization as it was contractually obligated to do. Earlier, the bank made demands similar to MBIA’s to recover funds from the originators of the loans — money it didn’t share with the securities’ buyers, MBIA said.

Ambac Suit

The allegations echo claims made in January in a suit brought by Ambac Assurance against the defunct investment bank Bear Stearns and JPMorgan. Ambac first sued in 2008 in federal court in Manhattan. The insurer filed a separate lawsuit over the issues in New York State Supreme court in February.

“Ambac is a large, sophisticated insurance company that is trying to blame others for risks it knowingly took and was paid for taking,” Zuccarelli said earlier this year. “We do not believe Ambac’s claims are meritorious and intend to defend Bear vigorously.”

Credit Suisse, in a filing in MBIA’s case on April 29, said contracts for its mortgage-bond transaction didn’t call for the bank to repurchase loans simply because they became delinquent within a few months or involved borrower fraud. That differed from contracts between mortgage originators and Credit Suisse, the bank said.

Originators’ Commitments

Credit Suisse cited e-mails between its employees and MBIA officials before the deal closed, which the bank argued had stated explicitly that those so-called representations and warranties wouldn’t be made. Representations and warranties are contractual promises that loans meet certain characteristics or will perform in certain ways.

The loan originators’ commitments to Credit Suisse “are different from — and materially broader than — Credit Suisse’s representations and warranties” tied to the securitization transaction, the bank said in court filings.

“MBIA is entitled to what its contracts with CS provide, and not more,” Vames, the Credit Suisse spokesman, said yesterday in an e-mail.

MBIA said in yesterday’s court filing that Credit Suisse in some cases cited the same issues as it later did to reach settlements with lenders, and that any early loan defaults should have been seen as “red flags” for further reviews of its obligations.

Early Defaults

A review by Credit Suisse in 2006 showed that 60 percent of loans with early defaults failed to meet promised underwriting guidelines, MBIA said, citing an e-mail between the banks’ employees.

External auditor PricewaterhouseCoopers LLP advised Bear Stearns in August 2006 that it needed to review loans that were defaulting or defective to see if their quality breached its obligations and begin the “immediate processing of the buy-out if there is a clear breach in order to match common industry practices, the expectation of investors and to comply” with its mortgage bonds’ contracts, according to Ambac’s filing.

Its own lawyers by early 2007 were making similar suggestions, according to the insurer’s amended complaint.

MBIA is seeking access to a database that contains information about Credit Suisse’s “quality control and repurchase processes” and shows how much the bank recovered from loan originators, according to its suit. Before MBIA found references to the database through the lawsuit, Credit Suisse denied its existence, the insurer said.

‘Previously Securitized’

The insurer’s filing said that it has also discovered “in the last few weeks” that the securitization at issue in the case, HEMT 2007-2, included home loans that “were previously securitized by Credit Suisse and then repurchased by Credit Suisse as defective, just months before Credit Suisse pumped them” into the deal.

“MBIA is unable to determine what Credit Suisse knew about the defects associated with these recycled loans that required their repurchase from other securitizations,” the insurer said.

MBIA filed hundreds of pages of records and e-mails between Credit Suisse employees, loan originators and brokers that the insurer says show the bank knew of — and received recoveries on — loans on which borrowers misrepresented income or otherwise failed to comply with underwriting guidelines.

“They show Credit Suisse’s motivation and scienter for fraudulently inducing MBIA to participate in” the bond deal, the insurer said in court filings. The bank did so, “in part, to obtain double-recoveries on the defective loans by shoveling them into the trust, profiting from their securitization, and then recovering again when it demanded that the originators of those loans repurchase them, even though Credit Suisse no longer owned the loans.”

Adult Entertainer

In the e-mails involving the North Carolina stripper’s loan application, Credit Suisse employees questioned whether her income was accurately reported.

“We have an adult entertainer that is stating $142,800 per year,” Ron Szukala, a Credit Suisse underwriting manager in Florida wrote in a January 2007 e-mail to another bank employee. “While I know this profession can make decent money, we feel that $142K is overstated in NC.”

“I don’t believe she is making $12K per month,” Robert Sacco, a director at the bank, wrote in a separate e-mail, saying that of all the so-called Alt-A loans the bank bought in 2006, 1 percent of those with fully documented incomes had gone delinquent for 60 days or more, compared with 5.56 percent for loans with stated incomes. “5 1/2 times worse because they are overstating their income on their application,” Sacco wrote.

One case is MBIA Insurance Corp. v. Credit Suisse Securities (USA) LLC, 603751/2009, New York State Supreme Court (Manhattan). Another is Ambac Assurance Corp. v EMC Mortgage Corp., 650421/2011, New York state Supreme Court (Manhattan). Another is Ambac v. EMC Mortgage, 08-cv-9464, U.S. District Court, Southern District of New York (Manhattan).

A Senate panel released a damning report accusing the likes of Goldman Sachs of engaging in massive conflicts of interest, contaminating the U.S. financial system with toxic mortgages and undermining public trust in U.S. markets in the months leading up to the financial crisis.

Just when you thought Washington lawmakers were over that whole financial crisis thing, Senator Carl Levin, D-Mich., and Senator Tom Coburn M.D., R-Okla, blast Wall Street in a 635-page report stemming from a 2-year bipartisan investigation on the key causes of the crisis.

The report comes at a time when much of the feeling from lawmakers in Washington is that Wall Street is being over-regulated by the new Dodd-Frank rules.

The report from the Senate’s Permanent Subcommittee on Investigations however takes an opposite view by citing internal documents and private communications of bank executives, regulators, credit ratings agencies and investors to depict an industry that  was rife with conflicts of interest and reckless during the mortgage surge.

Senator Levin said in the release yesterday:

“Using emails, memos and other internal documents, this report tells the inside story of an economic assault that cost millions of Americans their jobs and homes, while wiping out investors, good businesses, and markets,” said Levin. “High risk lending, regulatory failures, inflated credit ratings, and Wall Street firms engaging in massive conflicts of interest, contaminated the U.S. financial system with toxic mortgages and undermined public trust in U.S. markets.  Using their own words in documents subpoenaed by the Subcommittee, the report discloses how financial firms deliberately took advantage of their clients and investors, how credit rating agencies assigned AAA ratings to high risk securities, and how regulators sat on their hands instead of reining in the unsafe and unsound practices all around them.  Rampant conflicts of interest are the threads that run through every chapter of this sordid story.”

The report takes specific issue with the way Goldman Sachs touted investments to clients on one end but bet against them on the other. A similar accusation against Goldman by the SEC lead to a $550 million settlement last year, but Levin and his team don’t think that punishment fits the crime. From the report:

When Goldman Sachs realized the mortgage market was in decline, it took actions to profit from that decline at the expense of its clients.  New documents detail how, in 2007, Goldman’s Structured Products Group twice amassed and profited from large net short positions in mortgage related securities.  At the same time the firm was betting against the mortgage market as a whole, Goldman assembled and aggressively marketed to its clients poor quality CDOs that it actively bet against by taking large short positions in those transactions.

New documents and information detail how Goldman recommended four CDOs, Hudson, Anderson, Timberwolf, and Abacus, to its clients without fully disclosing key information about those products, Goldman’s own market views, or its adverse economic interests.  For example, in Hudson, Goldman told investors that its interests were “aligned” with theirs when, in fact, Goldman held 100% of the short side of the CDO and had adverse interests to the investors, and described Hudson’s assets were “sourced from the Street,” when in fact, Goldman had selected and priced the assets without any third party involvement.

New documents also reveal that, at one point in May 2007, Goldman Sachs unsuccessfully tried to execute a “short squeeze” in the mortgage market so that Goldman could scoop up short positions at artificially depressed prices and profit as the mortgage market declined.

This isn’t the first time Levin is gunning for Goldman. Back in April 2010, the Senator had a memorable back-and-forth with a Goldman executive during a testimony where the two discussed a “shitty deal” the firm was selling to clients.

Hear Levin say “shitty deal” numerous times:

In fact, Levin referred to that very testimony yesterday saying he doesn’t think Goldman executives were being truthful about its activity, and that he would refer the testimony to the Department of Justice and the Securities and Exchange Commission for possible criminal investigations.

“In my judgment, Goldman clearly misled their clients and they misled the Congress,” he said.

Goldman isn’t alone in feeling Levin’s wrath though. The report also points to Deutsche Bank AG (DB) saying the Frankfurt-based company created a $1.1 billion CDO with assets that its traders referred to as “crap” and “pigs” but then attempted to sell “before the market falls off a cliff.”

The 650-page indictment reveals the myriad of ways Wall Street lies, cheats, steals and defrauds on a routine basis. Arguably the report is as revealing as the Nixon tapes or the Pentagon Papers. Unfortunately, it’s too technical to get widely read. So here are the Cliff Notes.  

This study, broken into four case studies, forms a biblical tale of how toxic mortgages were born, nurtured and spread like the plague throughout the land, making money for the financial philistines every step of the way.  

The first case study focuses on Washington Mutual (WaMu), the nation’s largest savings bank, and its overt strategic decision to go big into selling high risk, high profit mortgages. Here you will find a detailed description of every type of dangerous mortgage foisted onto the public. Your blood pressure also will climb when you read how the bank used focus groups to help its mortgage brokers find better ways to sucker customers into risky mortgages even though the applicants had qualified for and wanted safer fixed-rate mortgages.

The report also details outright fraud committed by brokers – forging documents, making phony loans, stealing money – who then got rewarded again and again by the bank for their high sales records, even after they were caught! Nobody cared because the loans quickly were sold to Wall Street – the riskier the loan, the higher the interest rates and the more Wall Street would pay.   

The second case recounts the pathetic tale of the Office of Thrift Supervision, the regulatory agency that was supposed to halt WaMu’s shoddy and corrupt practices. The report shows that OTS knew of these deceptive practices in great detail for five full years and still failed to stop the pillaging. Why? Because OTS’s top regulators didn’t believe in regulations. Banks should regulate themselves. OTS only wanted to help. And one way it helped was by deliberately impeding other regulators like the FDIC from enforcing stronger regulations on WaMu. The OTS, which mercifully has been eliminated, believed it was partners with the banks it supposedly regulated — a textbook example of regulatory capture combined with financial Stockholm syndrome. 

The third case study which focuses on the two largest rating agencies (Moody’s and Standard and Poor’s) is a story of prostitution. Here we learn how the rating agencies turned trick after trick for the big Wall Street banks, doling out favors (AAA ratings) to thousands of “innovative” securities based on the junk mortgages that WaMu and others originated and packaged. Then when it became obvious to everyone that the crap was still crap, the whores went virtuous by drastically downgrading thousands of toxic assets overnight. This forced pension funds and insurance companies, who by law could only hold investment grade securities, to dump their downgraded assets all at once. The result was a rapid and deep collapse of all financial markets. (You read this section of the report and you have to wonder how anyone in their right mind could take seriously S&P’s recent “negative outlook” rating on the U.S. Who are they shilling for now?)  

The last case study is the most pornographic as it strips bare two investment banks, Deutsche Bank and Goldman Sachs. The report accuses them of packaging and selling toxic securities while, at the same time, betting that those securities would fail. Furthermore, the report argues forcefully, that “Investment banks were the driving force behind the structured finance products that provided a steady stream of funding for lenders originating high risk, poor quality loans and that magnified risk throughout the U.S. financial system. The investment banks that engineered, sold, traded, and profited from mortgage related structured finance products were a major cause of the financial crisis.”

Not even credit rating agencies are spared in this report which concluded that “the most immediate cause of the financial crisis was the July 2007 mass ratings downgrades by Moody’s and Standard & Poor’s that exposed the risky nature of mortgage-related investments that, just months before, the same firms had deemed to be as safe as Treasury bills.”

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