The terms for the settlement of the robo-mortgage scandal and the states participating in the settlement are expected to be resolved soon. Unfortunately, as this settlement approaches, new and grave questions have emerged. These questions raise the possibility that the government may be turning a blind eye to tax evasion and fraud.
Last week, I wrote an article titled The Proposed Robo-Mortgage Settlement Might Give Banks A Free Pass. At the time the deadline for states Attorney's General to sign on to the settlement was February 3. It has now been pushed back to Monday, February 6.
In the article, I wrote that while the banks have insisted for the past several years that the robo-mortgage violations represented minor technical issues, which harmed no one. Recently, a different explanation has emerged: The possibility that the scandal was the back-end of activities that appear to represent tax evasion, the failure to comply with basic rules in securitizing mortgages, and massive fraud on the purchasers of the securitized mortgage bonds.
Now, I have received numerous requests to clarify this extraordinary alternative explanation.
It's complex, but here goes: First, as Yves Smith at Naked Capitalism explains, it appears the specific mortgages which were the assets comprising the securitized bonds were never actually transferred to the bonds, within the required time period (90 days under New York law).
By way of background: remember that the big concern about the release was that it would go beyond robosigning and waive other types of liability. The ones observers were most concerned about were what we called chain of title issues, namely that the parties that had put mortgage securitizations together had failed on a widespread basis to take the steps stipulated in their own contracts to transfer the notes (and in lien theory states, to assign the lien) properly.
The securitization agreements were rigid, requiring that the transfers through multiple parties be completed by a date certain, typically 90 days after the closing of the trust. Most deals elected New York law as the governing law for the trusts, and New York law allows them to operate only as stipulated. Since the notes were supposed to be transferred in by a particular date, trying to move them in later is a "void act" having no legal effect. That makes attempts to make transfers legally at this juncture a non-starter.
Having realized somewhat late in the game that their failure to do what they promised could interfere with trusts' ability to foreclose and create tons of liability, servicers and their various agents have relied on not just robosiging, but widespread document fabrication and forgeries to fix their transfer problem when judges have taken notice. Anyone who has been on this beat knows of numerous cases where foreclosure documents are challenged, say for being too late, not having the right transfers, etc, that new versions of supposedly original documents that tell the right story miraculously show up in court.
Since 1986, mortgage-backed securities have been issued to investors through SPVs [Special Purpose Vehicles] called REMICs (Real Estate Mortgage Investment Conduits). REMICs are designed as tax shelters; but to qualify for that status, they must be "static." Mortgages can't be transferred in and out once the closing date has occurred. The REMIC Pooling and Servicing Agreement typically states that any transfer significantly after the closing date is invalid. Yet the newly robo-signed documents, which are required to begin foreclosure proceedings, are almost always executed long after the trust's closing date.
Third, as Brown also notes, the liabilities associated with a failure to transfer the documents on time came to head when:
Fannie Mae sent out a memo telling servicers that in order to be reimbursed under HAMP--a government loan modification program designed to help at-risk homeowners meet their mortgage payments--the servicers would have to produce the paperwork showing the loan had been assigned to the trust.
Brown believes that, as a result,
The hasty solution was a rash of assignments signed by an army of "robosigners," to be filed in the public records...
This explains why, as noted by Brown above, "the newly filed robo-signed documents" are "almost always executed long after the trusts closing date."
All of this is undoubtedly highly complex. And, I am not in a position to investigate whether it is true. However, the implications of these assertions are grave. If the mortgages were knowingly assigned to the REMICS after the closing date, then the tax benefits of the REMICS appear to be invalid. If so, these transfers (as I understand the law) represent tax evasion by the banks. As part of an ongoing scheme, they also constitute, in all likelihood, conspiracy and fraud on the bond purchasers.
With regard to the bond purchasers, as Yves Smith notes above, the failure to adequately establish the trusts created "tons of liability" for the banks to these purchasers; since the banks then effectively misrepresented the nature of the bonds they were selling.
At the moment, the important issue here is not the answer to these questions.
What's important is that their appears to be enough evidence to warrant at least a minimal investigation of these astounding assertions: The possibility that for years the banks have been knowingly misleading the public and the government on the extent to which robo-mortgage scandal activities were merely technical violations versus the back-end of potentially serious criminal activities and an attempt to evade enormous liabilities.
Finally, since I wrote Thursday's article two additional things happened:
First, readers privately wrote me indicating that the "bondholders are ready to pounce," saying that whatever the nature of the robo-mortgage settlement the bondholders (the bond purchasers referred to above) will challenge it on constitutional grounds, most likely as an unconstitutional taking.
Yves Smith at Naked Capitalism is now suggesting that the settlement amounts to a "Stealth Bank Bailout" by allowing "the banks to escape any meaningful liability or responsibility."
She believes, however, that the Administration may have underestimated the ferocity of the bondholder's response:
The Obama Administration may have decided that investors have acted enough like patsies, given how they have failed to react to rampant servicer abuses, that they judge the risk of investor litigation and a related PR embarrassment to be small. But this battle is not yet over. The rumblings I am hearing from investor-land remind of the sections of the Lord of the Rings when the Ents were finally roused. It isn't yet clear that investors will act, but if they do, the Administration will be unprepared for the vehemence of their response.
Second, readers wrote asking whether these issues were not all part by the suit announced by the New York State Attorney General on Friday (Feb.3). The frank answer is I don't know. However, none off the media coverage of the suit appears to suggest that the potential tax issues raised above are included in it. If the suit does encompass charges related to these issues, then Eric Scneiderman should, it would seem, clarify for the people the full implications of the suit he has brought.
Here's the take-away: If we are a nation where justice is blind, should we not investigate the validity of these questions before before we give the offending financial institutions another free pass with the forthcoming settlement?
The essence of an effective capitalist system is rules and accountability. For markets, and our larger economy to work, important players cannot be permitted to make up their own rules.