Why the AGs Must Not Settle: Robo-signing Is Just the Tip of the Iceberg
A foreclosure settlement between five major banks guilty of "robo-signing" and the attorneys general of the 50 states is pending for Monday, February 6th; but it is still not clear if all the AGs will sign. California was to get over half of the $25 billion in settlement money, and California AG Kamala Harris has withstood pressure to settle.
That is good. She and the other AGs should not sign until a thorough investigation has been conducted. The evidence to date suggests that "robo-signing" was not a mere technical default or sloppy business practice but was part and parcel of a much larger fraud, the fraud that brought down the whole economy in 2008. It is not just distressed homeowners but the entire economy that has paid the price, resulting in massive unemployment and a shrunken tax base, throwing state and local governments into insolvency and forcing austerity measures and cutbacks in government services across the nation.
The details of the robo-signing scam were spelled out in my last article, here. The robo-signing fraud and its implications are expanded on below.
Why All the Robo-signing?
Over half the homes in the country are now held in the name of an electronic database called MERS ―Mortgage Electronic Registration Services. MERS is a smokescreen behind which these mortgages were sold to trusts that sold them to investors. The mortgages were chopped into pieces and sold as "mortgage-backed securities" (MBS), which traded in a supposedly liquid market. That meant the investors could sell them in the money market at any time on a day's notice. Yale economist Gary Gorton gives this example:
Suppose the institutional investor is Fidelity, and Fidelity has $500 million in cash that will be used to buy securities, but not right now. Right now Fidelity wants a safe place to earn interest, but such that the money is available in case the opportunity for buying securities arises. Fidelity goes to Bear Stearns and "deposits" the $500 million overnight for interest. What makes this deposit safe? The safety comes from the collateral that Bear Stearns provides. Bear Stearns holds some asset-backed securities [with] a market value of $500 millions. These bonds are provided to Fidelity as collateral. Fidelity takes physical possession of these bonds. Since the transaction is overnight, Fidelity can get its money back the next morning, or it can agree to "roll" the trade. Fidelity earns, say, 3 percent.
That is where the robo-signing came in. Foreclosure defense attorneys armed with the tools of discovery have discovered that robo-signing ―involving falsified signatures assigning mortgages back to the trusts allegedly owning them― occurred not just occasionally or randomly but in virtually every case. Why? Because the mortgages had to be left free to be bought and sold on a daily basis in the money market by investors. The investors are not interested in making 30 year loans. They want something short-term with immediate rights of withdrawal like a deposit account.