More Evidence Emerging of the Big Banks Role in Mortgage Meltdown

0New Orleans      If there is anyone over the age of 10 years old that has any doubt that the pure and simple, unchecked greed of banks caused the mortgage meltdown triggering the Great Recession, please read, and listen carefully.   Information now coming out on the dealings between Morgan Stanley, the Wall Street behemoth that acted as the primary financier, facilitator, and purchaser of tranches from high-flyer New Century whose fall in 2007 signaled that the party was over make it crystal clear that they funded the mess until it broke the economy and almost bankrupted them as well.  Follow the big money and the trail becomes impossible to miss.

Reports are emerging from of all places an ACLU lawsuit, representing some buyers who lost their homes,  of emails and other information that has come from the discovery process.  Morgan Stanley tried to squash the suit, but a federal judge has now ruled that there is more than enough to push the matter forward.  The Justice Department and local prosecutors are also smelling blood in the water and predicting that Morgan Stanley will settle for a pretty penny before summer gets too hot.

Once again resources and their availability from Morgan Stanley seem to have been irresistible to New Century.  I’m in danger of starting to develop a global theory of how money and resources more than any other factor moves – or halts — not only too much of the work of social change but virtually all of what we see in not only this mess, but also tech, research, medicine, and a lot of other fields, so that’s a warning of things to come.

In this case,  Morgan Stanley was the biggest buyer of New Century subprime loans from 2004 to 2007, about $42 billion worth, and insisted that they wanted packages that were heavily weighted towards adjustable rate, ARM loans, or what the New Century CEO and co-founder once referred to in a negotiating session with ACORN and his own personal situation as “drinking his own Kool-Aid.”  Oh, and make sure they have pre-payment penalties as well, ok?  Risk and compliance factors low on the Morgan Stanley totem pole, in other words, not at the trading desks where sales are sex and everything else is road kill,  and were consistently ignored, even when the big bosses knew better.

According to a report in the New York Times

another lower-ranking due diligence officer, Bernard Zahn, who wrote detailed emails to both Ms. [Pamela] Barrow [a top diligence officer] and Mr. [Steven] Shapiro [head of the trading desk] explaining, in increasingly urgent terms, problems with the loans they had bought.  “It isn’t ‘just a couple of typos or ‘mistakes’ as it was suggested, the more we dig, the more we find.”  Ms. Barrow congratulated Mr. Zahn: “good find on the fraud :).” But rather than pursuing his findings, she immediately went on: “Unfortunately, I don’t think we will be able to utilize you or any other third party individual in the valuation department any longer.”

Hard to miss that message.   You can ask, just don’t tell.

Barrow in another exchange was pretty clear about what they thought of the quality of their borrowers as well, when she…

wrote to a colleague in 2006 sarcastically describing the “first payment defaulting straw buyin’ house-swappin first time wanna be home buyers.” “We should call all their mommas,” Ms. Barrow added in the email. “Betcha that would get some of them good old boys to pay that house bill.”

Well, yeah, and if loan affordability had ever been a criteria rather than bonuses and greed on Wall Street, millions might not have suffered. How do you explain all of that and what you did to your mommas and papas, Morgan Stanley big whoops?

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Mortgage Brokers Wrest Free of Real Regulatory Reform

one woman protest against New Century

New Orleans     On the eve of the subprime meltdown in 2007 in Orange County, I met with a co-founder and the new CEO, general counsel, and some of the board members of the high flying mortgage player, New Century, along with several ACORN leaders from California, and ACORN’s national housing directors.  We listened to crazy talk about algorithms that masked as risk assessment, the fact that half of their multi-gazillion loan portfolio involved so-called “stated income” loans (now more popularly known as “liar’s loans”), and their weak claims of having turned a few cases of fraud perpetrating brokers over to legal authorities.  Months later their whole house of cards came falling down on top of their borrowers and started the domino fall of the housing industry trigger the Great Recession.

But, the only time the CEO’s head snapped around sharply and there was an immediate agreement in the meeting that there would be immediate action came when we confronted them with the compensation schemes of their Texas-based brokers that gave the broker network huge incentives to close the loans no matter what the terms to fuel their numbers machines no matter how soggy the stuff.  Immediately he got the fact that the broker network was out of control.  He didn’t immediately confess that their algorithms were equally bogus, but he must have now it.  Mike Shea with our housing corporation once again made the point that in negotiations after negotiations with Ameriquest, CitiMortgage, and others, a disproportionate part of the predatory swamp of subprimes outfits was knee deep because they relied on broker networks that were often independent and always inadequately controlled and supervised.  Brokers were the boiler rooms running the mortgage scams that brought down the housing market.

Last week the Consumer Financial Protection Bureau (CFPB) issued its last draft rules with one that supposedly barred brokers from being paid incentives to push consumers into higher priced, unaffordable loans…the same thing that snapped New Century’s CEO’s head almost off of his neck.  According to the Wall Street Journal, the CFPB backed away from more aggressive proposals to restrict fees, which is a sure sign that this problem will be back, like a bad penny.  As soon as I read quotes from the American Bankers Association and the Mortgage Bankers Association, I could see the red flags flying that we were getting fleeced again big time.

It seems that brokers, many of who are licensed by the states in a process that is most reminiscent of sending in five bucks to the Universal Life church to become a minister, can still be paid crazy fees for “high-cost abusive loans” as long as they “received the same fee for all loans.”  OMG!  Are you kidding me?  I can see the signs coming out on store fronts in lower income and working neighborhoods all over America offering people quick fixes at high dollar amounts to become home owners “at any cost!”  Within no time, they could crowd out pay day lenders and check cashing stores from strip malls in our communities.

This was a tragic giveaway.  Let’s hope as the disaster breaks out, the CFPB will take more seriously the “consumer protection” part of its name rather than the “financial bureau” part that leans towards the banker buddies at the first whisper of wind.  In the meantime it will be left to the states to try to do better, but it goes without saying that that’s going to be hard and thankless work that no one really has the capacity to do these days.

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