Even at this stage of the game, the banks generally knew that the loans they were buying and reselling to investors were shady. A company called Clayton Holdings, which analyzed nearly 1 million loans being prepared for sale in 2006 and 2007 by 23 banks, found that nearly half of the mortgages failed to meet the underwriting standards being promised to investors. Citigroup, for instance, had 29% of its loans come up short, but it still sold a third of those mortgages to investors. Goldman Sachs had 19% of its mortgages flunk the test, yet it knowingly hawked 34% of the risky deals to investors.
Keith Johnson, the head of Clayton Holdings, was so alarmed by the findings that he went to officials at three of the main ratings agencies -- Moody's, Standard and Poor's, and Fitch's -- and tried to get them to properly evaluate the loans. "Wouldn't this information be great for you to have as you assign risk levels?" he asked them. (Translation: Don't you ratings agencies want to know that half these loans are crap before you decide whether to give them a thumbs-up?) But all three agencies rejected his advice, fearing they would lose business if they adopted objective standards. In the end, the agencies gave large chunks of these mortgage-backed securities AAA ratings -- which means "credit risk almost zero."
Since these mortgage-backed securities paid much higher returns than other AAA investments like treasury notes or corporate bonds, the banks had no trouble attracting investors, foreign and domestic, from pension funds to insurance companies to trade unions. The demand was so great, in fact, that they often sold mortgages they didn't even have yet, prompting big warehouse lenders like Countrywide and New Century to rush out into the world to find more warm bodies to lend to.
In their extreme haste to get thousands and thousands of mortgages they could resell to the banks, the lenders committed an astonishing variety of fraud, from falsifying income statements to making grossly inflated appraisals to misrepresenting properties to home buyers. Most crucially, they gave tons and tons of credit to people who probably didn't deserve it, and why not? These fly-by-night mortgage companies weren't going to hold on to these loans, not even for 10 minutes. They were issuing this credit specifically to sell the loans off to the big banks right away, in furtherance of the larger scheme to dump fraudulent AAA-rated mortgage-backed securities on investors. If you had a pulse, they had a house to sell you.
Why does stuff like this matter? Because when the banks put these mortgage-backed security pools together, they were telling their investors that they were putting their money into tidy collections of real, performing home loans. But frequently, the loans in the trust were complete sh*t. Or sometimes, the banks didn't even have all the loans they said they had. But the banks sold the securities based on these pools of mortgages as AAA-rated gold anyway.
In short, all of this was a scam
And that's why so many of these mortgages lack a true paper trail. Had these transfers been done legally, the actual mortgage note and detailed information about all of these transactions would have been passed from entity to entity each time the mortgage was sold. But in actual practice, the banks were often committing securities fraud (because many of the mortgages did not match the information in the prospectuses given to investors) and tax fraud (because the way the mortgages were collected and serviced often violated the strict procedures governing such investments). Having unloaded this diseased cargo onto their unsuspecting customers, the banks had no incentive to waste money keeping "proper" documentation on all these dubious transactions.
In a great number of these cases, the homeowners would have a pretty good chance of beating the rap, at least temporarily, if only they had lawyers fighting for them in court. But most of them don't. In fact, more than 90% of the cases that go through foreclosure courts are unopposed. Either homeowners don't know they can fight their foreclosures, or they simply can't afford an attorney. These unopposed cases are the ones the banks know they'll win -- which is why they don't sweat it if they take the occasional whipping from a properly lawyered homeowner.
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