WHY ALL THE ROBO-SIGNING? SHEDDING LIGHT ON THE SHADOW BANKING SYSTEM

The Wall Street Journal reported on January 19th that the Obama Administration was pushing heavily to get the 50 state attorneys general to agree to a settlement with five major banks in the “robo-signing” scandal. The scandal involves employees signing names not their own, under titles they did not really have, attesting to the veracity of documents they had not really reviewed. Investigation reveals that it did not just happen occasionally but was an industry-wide practice, dating back to the late 1990s; and that it may have clouded the titles of millions of homes. If the settlement is agreed to, it will let Wall Street bankers off the hook for crimes that would land the rest of us in jail – fraud, forgery, securities violations and tax evasion.

To the President’s credit, however, he seems to have shifted his position on the settlement in response to protests before his State of the Union address. In his speech on January 24th, President Obama did not mention the settlement but announced instead that he would be creating a mortgage crisis unit to investigate wrongdoing related to real estate lending. “This new unit will hold accountable those who broke the law, speed assistance to homeowners, and help turn the page on an era of recklessness that hurt so many Americans,” he said.

The Deeper Question Is Why

Whether massive robo-signing occurred is no longer in issue. The question that needs to be investigated is why it was being done. The alleged justification—that the bankers were so busy that they cut corners—hardly seems credible given the extent of the practice.

The robo-signing largely involved assignments of mortgage notes to mortgage servicers or trusts representing the investors who put up the loan money. Assignment was necessary to give the trusts legal title to the loans. But assignment was delayed until it was necessary to foreclose on the homes, when it had to be done through the forgery and fraud of robo-signing. Why had it been delayed? Why did the banks not assign the mortgages to the trusts when and as required by law?

Here is a working hypothesis, suggested by Martin Andelman: securitized mortgages are the “pawns” used in the pawn shop known as the “repo market.” “Repos” are overnight sales and repurchases of collateral. Yale economist Gary Gorton explains that repos are the “deposit insurance” for the shadow banking system, which is now larger than the conventional banking system and is necessary for the conventional system to operate. The problem is that repos require “sales,” which means the mortgage notes have to remain free to be bought and sold. The mortgages are left unendorsed so they can be used in this repo market.

Check this one out in full here…

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