As a general rule, securities fraud plaintiffs benefit
from telling the whole story while defendants benefit from dividing and
conquering claims: "Well, that allegation's no big deal; there's not much
evidence for that one; I don't see the scienter in that one."
The defendants in the mortgage fraud and their allies, including the Obama
administration, have made every effort to divide it into three separate worlds:
predatory lending, securities fraud, and forgery. Their approach follows the
classic strategy of securities fraud defendants: force the plaintiffs to
enumerate and specify their claims, and then knock those claims out one-by-one.
The last thing defendants want is for the plaintiffs to show how the claims
interlock, prove each other, and establish overwhelming scienter in every
The "whole story" of the mortgage fraud goes
something like this. First, the banks and originators engaged in predatory
lending by seeking out and granting mortgages to anyone who would remotely be
willing to assume one, regardless of the fact that doing so would be harmful to
those borrowers because they couldn't possibly afford the mortgages, and to
investors because those mortgages would eventually default. Then, the banks
amazingly did not even bother to document the mortgages properly or properly
transfer the mortgages to trusts before selling pieces of the trusts to
investors. In reality, the trusts never even had an ownership interest in most
of the mortgages or recourse to the underlying properties. Instead, the trusts
contained only lists of mortgages, as opposed to the mortgages themselves. And
to reiterate, the mortgages on those lists were the result of predatory lending
and were destined to experience a massive default rate that would hurt the
investors even had the trusts in fact owned them.
Finally, realizing after-the-fact that they hadn't
bothered to transfer ownership of the mortgages to the trusts and that this was
proving to be a problem in those pesky judicial states, the banks engaged in
massive widespread forgery to try to cover up their fraud on the investors and
the borrowers. See, e.g., Kemp v. Countrywide Home Loans, Inc., 440 B.R. 624,
629 (D.N.J. Bankr. 2010). See also: http://www.creditslips.org/creditslips/2011/06/do-we-have-a-fraud-problem-the-case-of-the-mysteriously-appearing-allonge.html.
The forgery has spanned a spectrum of criminality ranging from robo-signing to
more blatant forgery. An even larger problem with the forgery is that it tore
away the remaining shreds of credibility possessed by our longstanding title
and recording systems, which at that point only suffered from a huge number of
"gaps" in a huge number of loan files. Now, there are not only gaps
but also forged documents all over the place with no surefire way to tell which
documents are forged and which are not. Indeed millions of those forged
documents have been knowingly accepted by courts and AGs all over the country.
So at this point, if you bought a house between 1998 and 2008, the best way
left to prove that you "own" the house is your physical possession of
it, assuming you live in it. All of the papers, systems, procedures and records
that are supposed to legally establish (separate and apart from possession) who
owns your house and who owns the mortgage on it have been so thoroughly undermined
on so many different levels in our country that they would have no legal weight
or significance to a reasonable person with knowledge of the overall situation.
So that's something approximating the whole story:
widespread predatory lending followed by widespread securities fraud in the
sale of pools of those predatory mortgages followed by widespread forgery in an
attempted cover-up that has undermined our systems for recording ownership of
But instead of negotiating about this whole story, state AGs are engaged in
negotiations with the banks that the participants and the media are careful to
point out involve only "robo-signing," the polite term for
forgeries. Because the talks include no discussion of securities fraud in the
sale of the mortgage pools, no one asks the question: why were the widespread
forgeries necessary if the mortgage pools were what they purported to be?
Similarly, on a second front the FHFA complaints assiduously avoid mention of the
forgery and focus instead on seemingly innocuous statistical deviations from
underwriting standards in the composition of various pools of mortgage loans.
However the subsequent widespread forgeries single-handedly prove the section
11 claims in these complaints, or else the forgeries would not have been
necessary in the first place. Nevertheless, the complaints avoid discussing the
Similarly, the FHFA complaints fail to discuss with any granularity how
borrowers were duped and victimized by the banks and originators, who in
literally millions of cases forged income verification documents without the
borrowers' knowledge. Doesn't it stand to reason that establishing a pattern of
predatory lending would help establish a "departure from stated
underwriting standards"? Nevertheless, the FHFA complaints avoid
discussing the widespread predatory lending, just as they avoid discussing the
Finally, we have the meek predatory lending efforts of the states and the
nascent Consumer Financial Protection Bureau. Here, the predatory lending
component of the scandal is in effect raised briefly and then rapidly obscured
by vigorous prosecution of street-level mortgage fraudsters (the only people in
this whole matter being prosecuted at all) thereby sending the message that we
need to avoid rewarding greedy borrowers who should not be compensated for
reasons of moral hazard, despite the fact that TARP and its brethren rewarded
risky behavior on the part of banks and were the largest instance of moral
hazard in financial history. But if the banks weren't engaged in
predatory lending, then why was it necessary to lie in such an extreme manner
to the buyers of their mortgage pools about their underwriting standards? When,
as detailed in the FHFA complaints, 30-50% of the borrowers fell below the
stated underwriting standards, is it really credible that the banks weren't
knowingly handing out mortgages that they knew the borrowers could not
If David is going to beat Goliath -- if the justice and
accountability that Americans are pretty much united in demanding in the
aftermath of this historic fraud is to be achieved -- then David needs to
resist the defendants' efforts to reframe, separate and thereby minimize their
egregious wrongdoing and instead insist on telling the whole story.
If you prove predatory lending, you prove
knowing and deliberate departure from underwriting standards. If you prove
departure from underwriting standards, you go a long way toward proving knowing
and deliberate predatory lending. If you prove forgery, you prove knowing and
deliberate securities fraud in the sale of the mortgage pools. (After all, if
the mortgage pools were what they purported to be, then why were all those
subsequent forgeries necessary?) And if you prove fraud in the sale of the
"crap" (Angelo Mozilo's descriptor), you establish the motivation
for, and the knowing and deliberate nature of, the subsequent forgeries.
If someone tells the whole story, there isn't a jury in this nation that would
not convict or award damages in actions against any or all of the myriad
potential defendants responsible for this unprecedented episode of predation,
fraud and forgery. Who is going to tell it?
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Excellent overview. Thanks!
Very well said. Predatory Lending must be discouraged. We must all unite against this and fight back.