Written by Biloxi
What a week this has been. Finally, there may be some teeth in criminal investigation into the financial crisis. On Tuesday, President Obama announced during his State of the Union address to the nation that he will direct Attorney General Eric Holder to create a unit to probe the conduct that created the mortgage-backed securities bubble which led to the market crash and hold those individuals responsible. We learned that New York Attorney General Eric Schneiderman will be co-chairing this new unit called Residential Mortgage-Backed Securities Working Group. We do learn that Schneiderman will be joined by Delaware AG Beau Biden, Massachusetts AG Martha Coakley, Nevada AG Catherine Cortez Masto, California AG Kamala Harris and Illinois AG Lisa Madigan.
According to Schneiderman's interview on Wednesday, the RMBS Working Group will be part of the existing federal Financial Fraud Enforcement Task Force. Schneiderman said “Our working group is focusing on the conduct related to the pooling and creation of mortgage-backed securities…the conduct that created the crash, not the abuses that happened after the fact.” And Schneiderman added “the multi-state talks all relate to post-crash conduct. These are abuses in the foreclosure process.” So, when Schneiderman said " post-crash", he certainly is talking about at least going back 10 years of securitization where the banks had the exposure before the housing bubble burst. This should worry the banks. On Friday, Schneiderman made this comment during his interview the Rachel Maddow show concerning the involvement of other federal agencies include the IRS into the RMBS Working Group:
“To get this done Rachel, you need resources, you need jurisdiction, and you need will. And when I stood there today with Eric Holder and my other colleagues in government and other prosecutors, I really felt that we had that level of commitment [...] what we realized as we started to go back and forth over the last few months is that we all need to work together. There are situations that, New York’s securities law is a stronger law in some ways than the federal laws. Some of our statutes of limitations, though, are shorter. So we can’t go as far back. The federal statute is longer. We need everyone together. And the folks that we have in on this… the Consumer Financial Protection Bureau, Rich Cordray just, a whole array of new powers just came into existence with his appointment, which the President just got done very recently. That’s a huge addition. We have the Internal Revenue Service in, because there are huge tax fraud implications to some of the stuff that went on. All of the people who are in this, all of the agencies who are designated, working together, can achieve so much more than any one of us on our own.”
What intrigued me is the role of the IRS into the RMBS Working Group. I suspect the IRS may be looking in the Real Estate Mortgage Investment Conduits or REMICs. As you know REMIC status is a special treatment under the IRS code that is used for the pooling of mortgage loans and mortgage backed securities. REMIC status is exempt from federal taxes. If this is what the IRS will be pursuing with the RMBS Working Group, this spells major financial and legal trouble for the banks. I highly urge the RMBS Working Group to look in the important matter as we are talking about possible billions of dollars or possibly trillions of dollars owed by the banks to the IRS if the IRS proves that the banks violated the REMIC status.
Back in January 2011, I posted on my blog a case of a California grandmother, Abby Carr, who uncovered major robo-notary violations on her own title of her home. Ms. Carr, a former Director in Information Technology for a Fortune 500 company, discovered a major robo-notary operation. Click here to read her story. Ms. Carr had asked California Secretary of State Debra Bowen and Attorney General Kamala Harris to investigate the matter as she pointed out would be a serious interest to the investors:
Because if the assignments are invalid then, according to IRS laws on REMIC trusts (a tax entity and is usually formed as a trust for federal income tax), they were not really in the securities trust by the cutoff date when the investments were sold to the institutional investors. This would allegedly mean that the banks and investment houses were selling vaporware to investors and reaping the benefits of scamming the IRS out of taxes due. This would allegedly mean the banks and investment houses were committing fraud.
This would also mean that many lawyers representing the banks and investment houses, allegedly have been conducting fraud upon the courts in foreclosure actions & in the presentation of lost note affidavits to the courts…..yes even in the homeowner bankruptcy. This may have implications to those who are current on their mortgages, for they may not have clear title when they go to sell their homes, refi or even pay off their mortgage loans due to the defective assignment.
And of course in April 2011, Reuters confirmed this bombshell by the IRS that the agency was launching a review to whether banks violated tax requirements by mishandling the transfer of mortgages to REMICs. From Reuters:
Should the IRS find reason to take tough action, the financial impact could be enormous. REMIC investments are held by pension funds, in individual retirement plans such as 401(k)s and by state and local government entities.
As of the end of 2010, investments in REMICs totaled more than $3 trillion, according to data supplied by the Securities Industry and Financial Markets Association.
And now we just recently heard that John Hancock Life Insurance Company filed a lawsuit against JP Morgan Chase of misrepresentations of the purchase of the mortgage-backed securities. You can read the lawsuit here. In the lawsuit, JP Morgan Chase is accused of failing to ensure that title of the underlying mortgage loans were effectively transferred and questions that if that securitized trust qualified as a tax-free REMIC status. On page 133, the lawsuit provided the testimony Harvard Law School Professor Katherine Porter to the Congressional Oversight Panel in 2010 that spelled out the consequences of a trust losing REMIC status if the securitization trust is not properly transferred:
399. On October 27, 2010, Katherine Porter, then a visiting a professor at Harvard Law School specializing in consumer credit, consumer protection regulation, and mortgage servicing, provided similar testimony before the Congressional Oversight Panel:
The implications of problems with transfer are serious. If the [securitization] trust does not have the loan, homeowners may have been making payments to the wrong party. If the trust does not have the note or mortgage, it may not have standing to foreclose or legal authority to negotiate a loan modification. To the extent that these transfers are being completed retroactively, it raises issues about honesty in creating and dating the assignments/transfers and about what parties can do, if anything, if an entity in the securitization chain, such as Lehman Brothers or New Century, is no longer in existence. Moreover, retroactive transfers may violate the terms of the trust, which often prohibit the addition of new assets, or may cause the trust to lose its REMIC status, a favorable treatment under the Internal Revenue Code. Chain of title problems have the potential to expose the banks to investor lawsuits and to hinder their legal authority to foreclose or even to do loss mitigation.
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I want to share with the Panel that the lawyers that I have met over years of my research on mortgage servicing both creditor lawyers and debtor lawyers have nearly universally expressed that they believe a very large number (perhaps virtually all) securitized loans made in the boom period in the mid-2000s contain serious paperwork flaws, did not meet underwriting or other requirements of the trust, and have not been serviced properly as to default and foreclosure.
All eyes will be watching this new RMBS Working Group and so will the Register of Deeds heads all across the states since the county recorders offices claimed to been cheated in thousands of dollars of recordation fees ever since Mortgage Electronic Registration Systems or MERS, an electronic mortgage registry, bypassed the recording of mortgage assignments in local registry offices. And RMBS Working Group has taken off very quickly. We learned on Friday that the RMBS Working Group has sent subpoenas to the 11 largest financial institutions. We don't know which banks were targeted, but that is a good start. We don't know whether this new unit created by President Obama will work, but certainly this new unit has made a lot of the banks involved in the financial crisis very nervous.