'I bought a Chevy Vega, but I want it to be a Mercedes with a
12-cylinder ,'" Mr. Moynihan said in October. "We're not putting
up with that."
One-third of its subprime business is in default and Mr. Moynihan
thinks Countrywide was selling Vegas? If one third of Vegas crashed and
burned within three years of being purchased the metaphor might be apt
and completely incriminating. We argued that putting Bank of America
into receivership is the proper remedy for its substantial violations of
the law and for its continuing reliance on unsafe and unsound
practices. Outside reviews have documented the most extensive and
financially harmful violations of law and unsafe banking practices and
conditions in history.
As argued in a recent article by Jonathon Weil, the bank is nearing a
"tipping point" as markets recognize it is "cooking the books," vastly
overstating the value of its assets as it refuses to recognize the true
scale of losses on its purchase of Countrywide. Ironically, it still
carries on its books $4.4 billion of fictional "goodwill" value created
by overpaying for Countrywide (a notorious control fraud), as well as
$142 billion of home equity loans that are worth far less. A more honest
accounting of "good will" and of the value of home equity loans would
take a big bite out of Bank of America's market capitalization ($116
billion), which has lost 41 percent
of its value since April 15. The markets are moving ever closer to
shutting down the institution, but Moynihan is not "putting up with" the
demand by investors for Bank of America to come clean on its fraudulent
practices.
Ms. Mairone's Response Verifies Our Claims
Rebecca Mairone replied on behalf of Bank of America to our two-part
post. Step back for a moment and consider the context of Bank of
America's response. We cite evidence that the bank has committed
massive fraud, explain that this provides a legal basis for placing it
in receivership, and call on the FDIC to do so. Bank of America chooses
to respond publicly, but its response never contests its massive fraud
or our demonstration that there is a legal basis for placing it in
receivership.
Instead, Bank of America complains that we "do nothing to illuminate
the challenges [BofA's home mortgagees] face." This is not our task;
nevertheless, the claim is incorrect. We illuminate the problems posed
by the fact that nonprime borrowers were frequently victims of mortgage
fraud perpetrated by lenders as well as many other operatives in the
unprecedented criminal lending and securities fraud of the past decade.
This problem is typically ignored -- at least by the financial sector
and the mainstream media -- so we did "illuminate" the problem and the
cause of action borrowers could bring for "fraud in the inducement."
We showed that the fraudulent senior officers that controlled home
mortgage lenders created "liars," and NINJA loan programs designed to
induce millions of Americans to take out loans they could not afford to
repay. The endemic underlying fraud in the origination and sale of
nonprime loans is critical to understanding why loan defaults are
massive, why borrowers were typically the victims of the fraud and lost
their meager savings due to the frauds, why loan modifications typically
fail, and why foreclosure fraud has been so common. The endemic fraud
also hyper-inflated the bubble and helped cause the economic crisis and
severe loss of employment. Over a million Bank of America borrowers
face these "challenges" that we "illuminated."
Bank of America's response is guilty of what it criticizes; it
ignores the fraud by nonprime lenders and sellers, particularly Bank of
America's frauds in both capacities. It does not seek to "illuminate"
the frauds or the problems that arise from endemic mortgage fraud. We
did not invent the "epidemic" of mortgage fraud. The FBI began
testifying about that in 2004. The FBI predicted that it would cause a
"crisis" if it were not stopped -- and no one claims it was stopped.
The mortgage industry's own fraud experts opined publicly in 2006 that
the type of loans that Countrywide decided to elevate to its favored
product was an "open invitation to fraudsters" and fully deserved the
phrase that the lenders used to describe the product: "liars' loans".
(Bank of America chose to purchase Countrywide at a time when it was
notorious for the awful quality of its mortgage loans.) It is the
lenders and their agents, the loan brokers, that directed the lies in
these liar's loans and appraisals and it was the lenders that made
fraudulent "reps and warranties" in order to sell the fraudulent loans
on to others in the form of securities. Economists and white-collar
criminologists share a belief in "revealed preferences." The senior
officers that control lenders provide an "open invitation to fraudsters"
in the midst of an "epidemic" of fraud because they intend to profit
from those frauds.
Instead of contesting its issuance and sale of massive numbers of
fraudulent loans, Bank of America writes to provide data on
delinquencies and foreclosures in support of its claim that it is the
victim of Countrywide's deadbeat borrowers who it tries in vain to help.
Bank of America's data, however, add support for the evidence of
widespread mortgage fraud, particularly by Countrywide. Accounting
control frauds maximize their (fictional) reported income by lending
routinely to those who cannot afford to repay their loans. It is this
aspect of the fraud scheme that is most counter-intuitive to those that
do not study fraud, but to criminologists it provides the most
distinctive markers of fraud. The senior officers that control
fraudulent lenders maximize the bank's reported short-term income, in
order to maximize their compensation, by growing extremely rapidly
through making loans at a premium yield. This strategy creates a "sure
thing" (Akerlof & Romer 1993). The lender is sure to report record
(fictional) profits in the short term and suffer enormous (real) losses
in the longer term.
The Evidence Supports Our Claims of Fraud
If we are correct that Countrywide operated as a fraud we would expect to find the following:
- disproportionately large rates of loan delinquencies and defaults
- huge losses upon default, and
- fraudulent representations and appraisals.
We would also predict widespread fraud in the "reps and warranties"
that Countrywide and Bank of America provided to purchasers of nonprime
loans originated by Countrywide. As we emphasized in our initial posts,
a wide range of financial entities have confirmed the widespread fraud
in the reps and warranties. This is why Bank of America is being sued.
The data they provided in its response to our blogs supports the first
three predictions.
First, Bank of America admits to a 14 percent delinquency rate on its
mortgages. That percentage is roughly seven times greater than the
normal delinquency rate for prime loans. It is roughly three times the
traditional rule of thumb for a fatal delinquency rate (5 percent) for a
home lender. Losses upon default during this crisis are dramatically
greater than the historic percentages, and loss reserves were at
historic lows, so the traditional rule of thumb for fatal losses is
unduly optimistic in this crisis.
Second, Bank of America's response states that Countrywide-originated
loans have caused 85 percent of total delinquencies. Bank of America
was a massive mortgage lender before it acquired Countrywide, so taken
together these data suggest that the delinquency/foreclosure rate for
Countrywide-originated mortgages must have been well over 20 percent --
over ten times the normal delinquency rate and four times the
traditional rule of thumb for fatal losses. These exceptionally large
rates of horrible loans, defaulting so quickly after origination, are a
powerful indicator that Countrywide was engaged in accounting control
fraud. Unfortunately, lenders that specialized in making nonprime loans
were typically fraudulent. The result was a massive bubble and economic
crisis.
Our conclusions are well-supported by many other analyses, many of which were conducted long ago. For example, Reuters reported in January 2008 that one-third of Countrywide's subprime mortgages were already delinquent:
“More credit counseling could have prevented some of the worst banking practices that helped spur the recession,” says Mike Newbold. Mike is a regional president for Ohio-based Huntington National Bank. I know that the majority of professionals view our marketplace as a place where we need to close our current transactions and simply get paid. But the truth of the matter, is that we need to ensure that we grow with our current client base, they are our lifeblood through the most difficult marketplace, so we need to take care of them.
What about this scenario? Agents discuss a brief synopsis of the real estate process with their clients. Shortly thereafter, agents should call their trusted mortgage brokers to ensure that they can afford to buy, but also that the consumer knows the implications of taking on such a responsibility. A two-hour seminar can consist of loan qualifying and the latest banking laws that are in force. This would be appropriate for first time home buyers because the lending landscape has changed quite a bit. However, I would venture to guess that even veteran homeowners will benefit from this kind of program.
I can appreciate the fact that most lenders simply do a quick review of paperwork, then slam the paperwork through as quickly as possible. After all, that’s what all real estate agents need them to do. But according to the study, it may behoove borrowers to take some time at the beginning of a transaction to become educated about the process. It will improve our rates of foreclosure in the future and allow the loans to perform instead of default. Additionally, I think that the new homeowner’s would appreciate the extra knowledge.
I am not naïve to think that the foreclosure would not have been an issue, eventually. No one was standing at the banks stating that the bubble would burst. However, an educational approach would have made the buyers pause and take note of the conditions. Most educational classes could have included the latest market trends in real estate & finance. Perhaps, the consumers would have been placed in a position to make a decision on their own. Understanding the incredible rise in home values, perhaps the typical buyer would have decided to wait.
Continued on the next page
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