By: Neil Garfield | LivingLies
Editor’s Comment: “Reckless?” No, it was intentional. And THAT lies at the heart of the media and government perception of this entire securitization scam. The worse the loan, the more money they made. By insuring it for 100 cents on the dollar they received total payback, plus they probably got the honor of foreclosing on the home, when they never funded or purchased the loan in the fist place. Since they were not the creditor, they were neither entitled to foreclose nor to receive insurance proceeds which should have gone to investors. But the investors are probably long gone having settled their claims with the investment banker that sold them bogus mortgage bonds.
On a side note, I have read the Master contract with Fannie and Freddie several times and I cannot tell if the agency was giving a guarantee of the bond given to investors or the loan, or both. But I do know that once it went into the secondary market, the bond was sold and resold multiple times, using the federal guarantee as an incentive to purchase the bond with a perception of no risk.
The negligence being asserted in these lawsuits from investors and government agencies is merely a cover-up for intentional fraud. The investors put up a sum of money expecting a varying return based upon LIBOR, which we all know was also bogus. The return was relatively small since the risk appeared to be non-existent and the bonds were rated Triple A.
But here is the trick. If you get $1 billion with the investor expecting a 5% return, and you add to the prospectus that the investor’s money can be used to pay the expected return (PONZI Scheme), then the only way for the scheme to continue is if people continue to buy the bogus mortgage bonds. But the real issue is the money. By lending the money out with a fair distribution of interest rates between 6%-12%, you don’t need to lend out the full $1 billion you received from the investors.
The investor is looking for $50 million per year in interest return. So if you lend out $500 million at 10% you get the nominal rate that WOULD produce the expected $50 million per year to the investor if it was ever paid. But in order to get 10% you have to loan to people who are likely NOT to be able to pay.
The remaining $500 million that was NOT loaned is kept by the Bank and they have never been required to account for this money. They call it proprietary trading. Explain how proprietary means trading with investor money!
The U.S. government sued Wells Fargo on Tuesday, claiming the San Francisco-based bank committed fraud by recklessly approving government-backed mortgages and then seeking government insurance when those loans flopped.
Officials with the U.S. Attorney’s office and the Department of Housing and Urban Development (HUD) made the announcement Tuesday. They contend in the lawsuit, filed in U.S. District court in Manhattan, that the Federal Housing Administration (FHA) has wrongfully paid millions of dollars in insurance claims on loans that defaulted.
“As the complaint alleges, yet another major bank has engaged in a longstanding and reckless trifecta of deficient training, deficient underwriting and deficient disclosure, all while relying on the convenient backstop of government insurance,” U.S. AttorneyPreet Bharara said. “As also alleged, Wells Fargo’s bonus incentive plan – rewarding employees based on the sheer number of loans approved – was an accelerant to a fire already burning, as quality repeatedly took a back seat to quantity.”
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