William K. BlackL. Randall Wray

William K. Black and L. Randall Wray

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Let’s Set the Record Straight on Bank of America, Part 2: Eliminating Foreclosure Fraud

Given the fact that we have obtained B of A’s attention (and that of the some administration officials), we ask the following questions that the public needs to make intelligent policy decisions.

  • Has Bank of America conducted a review of the bank’s assets that AMBAC reviewed and found a 97 percent rate of false reps and warranties?
  • If so, who conducted the review, and what rate of false reps and warranties did they find? Does Bank of America agree that liar’s loans have extremely high fraud rates?
  • Does Bank of America agree that an honest secured lender would never seek to inflate an appraisal?
  • Does Bank of America agree that a competent, honest secured lender would prevent others from frequently inflating appraised values?
  • Does Bank of America agree that appropriate home mortgage underwriting can minimize adverse selection and produce a positive expected value to home lending?
  • How many fraudulent mortgage loans made by Countrywide has Bank of America identified?
  • What is Bank of America’s procedure when it finds suspicious evidence of a fraudulent loan?
  • How many fraudulent mortgage loans, by year, since 2000, have Countrywide and Bank of America identified.
  • How many suspicious activity reports (SARs) did Bank of America file concerning mortgage fraud, by year, for the period 2000-to date? What are the position titles of the three most senior Bank of America managers that were a subject of the SARs filed by the bank?
  • How many SARs did Countrywide file, by year, for the period 2000 on?
  • How many mortgage loans or securities did Countrywide and Bank of America sell under false reps and warranties?
  • What was the allowance for loan and lease losses (ALLL) (aggregate amount and relevant ratios) provided by Countrywide and by Bank of America, each year from 2000 on for mortgages and mortgage securities? If it varied by type of mortgage provide the ALLL for each type.
  • Which years does Bank of America consider Countrywide’s ALLL to be adequate?
  • Has Bank of America reviewed Countrywide’s nonprime loans for fraud incidence, fraud losses, and the incidence of lender fraud and fraud by the lender’s agents? Please provide the results.
  • What has Bank of America done to remedy the injuries that borrowers suffered through loan or foreclosure fraud by them or Countrywide?
  • Does Bank of America agree that Countrywide’s nonprime lending was often conducted in a manner that was unsafe and unsound?
  • Does Bank of America agree that Countrywide’s record keeping was not adequate and required substantial improvement?
  • At current market value of its assets, just how insolvent is Bank of America
  • How much can the bank sell its toxic assets for in today’s market?
  • What is the value of mortgages and mortgage backed securities held by Bank of America for which it has no clear title?
  • How many MBSs has the bank sold to investors for which it does not hold the notes that are required?
  • What is the bank’s current estimate of losses it will suffer in court due to lawsuits by investors?
  • The top four banks are holding434 billion in second liens (good only if the first lien — the mortgage — is paid), and carrying these on their books at 90% of face value. What are Bank of America’s reasonably expected losses on second liens against properties that are delinquent, in foreclosure, or likely to go into foreclosure?
  • How large a sample of subprime and liar’s loans did BofA’s due diligence team review?
  • What likely mortgage fraud incidence did BofA’s due diligence team discover? What did they report to BofA with regard to fraud incidence? What changes in lending and personnel did BofA implement in response to these findings?
  • Bank of America has not responded to Bill Black’s prior requests that it terminate the services of its openly racist chief advisor in Germany: Hans-Olaf Henkel. We request a response.

This is the second installment of a two-part series. Read the first here.

We have explained in prior posts and interviews that there are two foreclosure-related crises. Our first twopart post called on the U.S. to begin “foreclosing on the foreclosure fraudsters.” We concentrated on how the underlying epidemic of mortgage fraud by lenders inevitably produced endemic foreclosure fraud. We wrote to urge government policymakers to get Bank of America and other lenders and servicers to clean up the massive fraud. We obviously cannot rely solely on Bank of America assessing its own culpability.

Note also that while we have supported a moratorium on foreclosures, this is only to stop the foreclosure frauds — the illegal seizure of homes by fraudulent means. We do not suppose that financial institutions can afford to maintain toxic assets on their books. The experience of the thrift crisis of the 1980s demonstrates the inherent problems created by forbearance in the case of institutions that are run as control frauds. All of the incentives of a control fraud bank are worsened with forbearance. Our posts on the Prompt Corrective Action (PCA) law (which mandates that the regulators place insolvent banks in receivership) have focused on the banks’ failure to foreclose as a deliberate strategy to avoid recognizing their massive losses in order to escape receivership and to allow their managers to further loot the banks through huge bonuses based on fictional income (which ignores real losses). We have previously noted the massive rise in the “shadow inventory” of loans that have received no payments for years, yet have not led to foreclosure:

As of September, banks owned nearly a million homes, up 21 percent from a year earlier. That alone would take 17 months to unload at the most recent pace of sales, and doesn’t include the 5.2 million homes still in the foreclosure process or those whose owners have already missed at least two payments.

Bank of America’s response admits how massive its contribution to the shadow inventory has been. Mairone implies that the bank delays its foreclosures for years out of a desire to help homeowners, but common sense, and their own data show that the explanation that makes most sense is that the bank is hiding losses and maximizing the senior officers’ bonuses by postponing the day that the bank is finally put into receivership.

We did not call for a long-term foreclosure moratorium. Our proposal created an incentive for honest lenders to clean up their act quickly by eliminating foreclosure fraud. We will devote a future post to our proposals for dealing with the millions of homes that the fraudulent lenders induced borrowers to purchase even though they could not afford to repay the loans.

Bank of America’s data add to our argument that hundreds of thousands of its customers were induced by their lenders to purchase homes they could not afford. The overwhelming bulk of the lender fraud at Bank of America probably did come from Countrywide, which was already infamous for its toxic loans at the time that Bank of America chose to acquire it (and also most of Countrywide’s managers who had perpetrated the frauds). The data also support our position that fraudulent lenders are delaying foreclosures and the sales of foreclosed homes primarily in order to delay enormous loss recognition.

The fraud scheme inherently strips homeowners of their life savings and finally their homes. It is inevitable that the homeowners would become delinquent; that was the inherent consequence of inducing those who could not repay their loans to borrow large sums and purchase homes at grossly inflated prices supported by fraudulent inflated appraisals. This was not an accident, but rather the product of those who designed the “exploding rate” mortgages. Those mortgages’ initial “teaser rates” induce unsophisticated borrowers to purchase homes whose values were inflated by appraisal fraud (which is generated by the lenders and their agents) and those initial teaser rates delay the inevitable defaults (allowing the banks’ senior managers to obtain massive bonuses for many years based on the fictional income). Soon after the bubble stalls, however, the interest rate the purchasers must pay explodes and the inevitable wave of defaults strikes. Delinquency, default, foreclosure, and the destruction of entire neighborhoods are the four horsemen that always ride together to wreak havoc in the wake of epidemics of mortgage fraud by lenders.

Out of these millions of fraudulent mortgages, Bank of America claims to have modified 700,000; of these, 85,000 are under HAMP. Still, the Treasury says that the bank has another 375,000 mortgages that already meet HAMP terms. In other words, Bank of America has been shockingly negligent in its efforts to modify mortgages. The Treasury reports that the bank’s performance is far worse than that of the other large banks. Alternatively, Treasury could be wrong about the mortgages; Bank of America may be refusing to modify mortgages for homeowners who appear to qualify for the HAMP terms because it knows the data Treasury relied upon is false. Their unusually low rate of HAMP modifications could be the result of the extraordinarily high rate of mortgage fraud at Countrywide.

Bank of America has admitted that HAMP’s “implicit” purpose is to help the banks that made the fraudulent loans — not the borrowers. That goal was the same goal underlying the decision to extort FASB to gimmick the accounting rules — delaying loss recognition. For example, as reported by Jon Prior

BofA Merrill Lynch analysts said critics of the program aren’t yet vindicated on their calls that HAMP is a failure. “While the increased re-default rates will provide more ‘fodder to those in the camp’ that regards HAMP as a failure, we do not think the story is so simple,” according to the report. The analysts said the revised re-default rates are in line with what they expected. While the “explicit goal” of HAMP to help 3m to 4m homeowners “appears unattainable at this point,” its “implicit goal” to stall the foreclosure process and provide some order to the flow of properties into REO status has been achieved, according to the report. “In our view, the implicit goal has been one of the key reasons for the stabilization in home prices,” according to the BofA Merrill Lynch report.

HAMP’s parallel goal is funneling more money to the banks that induced the fraudulent loans. Data indicate that neither the HAMP modifications nor those undertaken independently by the banks actually benefit homeowners. Most debtors eventually default even on the modified mortgage and end up in foreclosure. Further, many reports indicate that banks encourage homeowners to miss payments so that they can qualify for HAMP, then use the delinquencies as an excuse to evict homeowners. Most importantly, as we reported, half of all homeowners are already underwater in their mortgages, or nearly so. Bank of America representative Rebecca Mairone does not report how many of these mortgages undergoing mods are underwater, but given the massive lender fraud that included overvaluation during the property appraisal process (in other words, even before property values fell these mortgages were probably underwater), it is likely that most are. Since the modification merely lowers the monthly payment but leaves the balance unchanged, the homeowners remain underwater. What this means is that homeowners are left with a terrible investment, paying a mortgage that is far larger than the value of the home. Because most modifications will lead to eventual default, all they do is to allow the bank to squeeze more life savings out of the homeowner before taking the home. Bank of America wants to be congratulated for such activity.

Meanwhile, Bank of America expects to receive billions of dollars for its participation in HAMP. The top three banks (JPMorgan Chase and Wells Fargo being the others) will share $17 billion because HAMP pays servicers, investors and lenders for restructuring. These top 3 banks service $5.4 trillion in mortgages, or half of all outstanding home mortgage loans. Yet, as Phyllis Caldwell, Treasury’s housing rescue chief has testified, there is no proof that these banks have any legal title to the loans they are modifying and foreclosing. In Bank of America representative Rebecca Mairone’s response to us, she does not respond to, let alone contest, the fact that her bank, as well as other banks, has been illegally foreclosing on properties — illegally removing people from their homes. Instead, she lists characteristics of those homeowners on which Bank of America might be illegally foreclosing: they are unemployed, they have not made payments in many months, a third no longer occupy their homes, and so on. It is interesting that she completely ignores all the important issues at hand with respect to the “deadbeat” homeowners. How many of these homeowners were illegally removed from their homes so that they became vacant?

Does Bank of America hold the “wet ink” notes on any of these homes, as required by 45 states? How many of these homeowners…

Continue reading here…

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4closureFraud.org


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