As 2008 opened wide, predictions were made by seers of all stripes. Britney and Hillary would triumph/implode. Pakistan would stabilize/explode. The housing market would rebound/erode. Predictions re the latter tended to focus on nuts, bolts, and bailouts. As in– Bernanke and Paulson, foreclosures and bankruptcies, and government powered plans to keep prices inflated and mortgage backed securities from turning into Confederate money. A nice slice of subprime borrowers would have their contractual obligations erased, taxpayers would back more subprime oops FHA mortgages, and legislation would Destroy All Mortgage Monsters. Some pundits did tackle the moral rot, gonzo greed, and financial duh underlying the mortgage mess– qualities which stretched from the inner mind of borrowers to the outer limits of large scale investors in subprime securities and funny funds. Free market optimists say that since Wall Street now gets the diff between pork bellies and homes, the excess is over. Real estate visionaries predict an ethical revolution in the industry.

Meanwhile, housing bubble watchers say 2008 will be the year of the mortgage mess lawsuit.

Crowds of aggrieved parties are queuing up. Some have real bones to pick. Such as home-buyers who paid developers big bucks for houses that won’t be built. Or homeowners who made payments that weren’t credited by mortgage servicers. Servicers like to say complainers are deadbeats, looking to hold onto unpaid-for property. But paper trails say some servicers are thieves. Home-owners who can’t afford legal battles with servicers based in other states or countries, lose their property. Flip! Another piece of real estate, back in the game. At least, that’s how the hand used to play. Now that no one wants to be caught holding foreclosures, will servicing abuse go the way of the bidding war?

Countrywide Financial Corp. is among the lenders being sued over alleged mortgage servicing abuse. (Government investigations are also in the hopper.) In mid January, Bank of America announced a plan to buy Countrywide, thereby rescuing it from the rumor of bankruptcy. Whew. Taxpayers dodged a bullet. Mortgage giants Fannie Mae and Freddie Mac, the government sponsored enterprises (GSEs) that enjoy a comfy line of credit from the U.S. Treasury and implicit backing by the federal government, have a whole lot of Countrywide exposure. Inquiring minds want to know: will BofA also acquire Countrywide’s liabilities? Which cover far more than just mortgage servicing. For instance, civil suiters in California claim Countrywide has been–

Predatory!

From sea to shining sea, class action suits are being launched by borrowers who claim they were steered into big bad risky loans. A dubious bone. Not that lenders didn’t hustle adjustable rate mortgages (ARMS) and other highly profitable usurious mortgage products. (Which for some bizarre reason were called “affordable”.) And profit seekers can be predatory. But in most cases, the ugly truth was spelled out in documents signed by borrowers. The print may have been fine, but there it was. Now that sagging values can’t make bad loans good via refi, or by predatory flips to greater fools, will borrowers pack magnifying glasses when hunkering down with folks whose self-interest is as active as their own, but whose financial sophistication is much greater?

Genuine victims of predatory lending do exist. But their numbers aren’t the legion invoked by “non-profit” housing and community groups seeking payouts from mortgage lenders and more power, via government decree, over the real estate market. Many of the bailouts proposed by pols call for non-profits to lend a big hand in mortgage work-outs for borrowers facing foreclosure. The role non-profits have played in many an FHA mortgage fraud is no cause for concern. HUD will weed out the bad apples.

Also big on the suit circuit: banks and investment firms suing mortgage lenders for passing along dodgy loans, and lenders suing mortgage brokers for originating dodgy loans. When the bubble was inflating, few seemed concerned about dodgy. Shareholders are also suing mortgage lenders (including Countrywide Financial) over sinking profits, while disappointed investors are suing banks and investment firms. Some investors claim they weren’t fully informed that securities backed by mortgages dubbed “subprime” were risky. Others say they didn’t even know they were investing in subprime.

In Springfield, Massachusetts, the Springfield Finance Control Board and other officials are riled at Merrill Lynch for making a bum subprime investment with municipal funds. The Control Board was created by the commonwealth of Massachusetts in 2004, to save Springfield from imminent financial collapse. A condition brought on by corruption (the FBI know Springfield like the dead know Brooklyn) and fiscal mismanagement, plus the loss of manufacturing as economic base. Upon submitting to state rule, the city received extensive financial resources, including a $52 million loan. The first payment is due in June, the full amount by 2012. Mayor Domenic Sarno and state Senator Stephen Buoniconti (D-West Springfield) are optimistic an extension will be granted. But just till 2025. Not the year 2525.

In April 2007, Springfield made a short term investment of $13.9 million with Merrill Lynch, in a high yield hedge fund named Centre Square CDO (Collaterized Debt Obligation). A fund based in the Cayman Islands. In August, the investment started tanking. By November, it was worth $1.2 mil. The Finance Control Board and local officials (including former Mayor Charles Ryan and new Mayor Domenic Sarno) claim Merrill didn’t reveal Centre Square was backed by subprime. Merrill says city officials “reviewed, approved, and authorized”* the investment. Merrill hasn’t named the officials yet, but should a lawsuit develop (Springfield has lawyered up) some public servants may have to ‘splain why a hedge fund described by Standard and Poors credit research as “a CDO of CDOs backed primarily by investment grade tranches of CDOs” seemed such a sure bet. Particularly in mid 2007.

Merrill Lynch will also be doing some ‘splaining. The Massachusetts office of the state attorney general and secretary of state are investigating the Springfield investment. (State law allows municipal funds to be invested in securities, but mortgage backed securities are a no-no. Too risky don’cha know.) Secretary of State William F. Galvin has subpoenaed the Merrill reps who sold Centre Square to Springfield– an assistant vice president of global wealth management, and a wealth management advisor from Merrill’s office in Albany, New York.

In Maryland, the administration of Baltimore Mayor Sheila Dixon is suing Wells Fargo Bank. Calling it “predatory”. Blaming the bank for burgeoning foreclosures in Baltimore’s black neighborhoods. Wells Fargo has been big in Baltimore since 2004. They sold a lot of high-interest mortgages in black neighborhoods. More than in white ones. Though subprime, most had fixed rates. The attorney representing the city says Wells Fargo should have known the borrowers couldn’t afford to repay. Some even suggest Wells Fargo was setting up borrowers to fail. If so, the city’s schools colluded by not teaching people how to compare their income and assets with the cost of carrying a mortgage.

Baltimore’s foreclosures may have more to do with white collar crime jacked by ubiquitous crap lending than with racism. The city has a history of real estate fraud leading to extensive defaults. In the late 90’s, mortgages backed by taxpayers via the Federal Housing Administration (FHA) mortgage insurance program were mined to a fare thee well. Frauds typically involved inflated appraisals on homes sold to first time buyers who couldn’t afford the equally inflated mortgages, and on properties illegally flipped to absentee landlords. The latter collected rent while defaulting– a practice known as equity stripping. The foreclosures and abandoned buildings which followed the frauds made Baltimore’s distressed neighborhoods even more so. In 2000, HUD (the parent agency of the FHA) created the Baltimore City Flipping and Predatory Lending Task Force.

The task force was composed of reps from HUD, the FHA, Fannie Mae, and the Greater Baltimore Board of Realtors. Along with the Baltimore City Housing Administration, assorted elected officials (including the office of U.S. Senator Barbara Mikulski of Maryland) lenders, developers, and local housing and community groups. Various law enforcement and regulatory agencies were on board as well. In October, 2003, Senator Mikulski issued an enthusiastic press release on the success of the task force, saying “Together we are driving the scammers and scum out of Baltimore.” In 2005, the task force disbanded. Could be the scammers and scum didn’t.

Incidentally, the Dixon admin isn’t suing Wells Fargo for borrower relief. The city wants compensation for projected harm caused by the loss of projected property tax revenues, plus the projected cost of maintaining stripped and flipped nabes. Other afflicted cities are watching the case avidly.

In Ohio, Mayor Frank Jackson of Cleveland isn’t suing just one measly predator. Jackson is targeting 21 investment banks and lenders! His hit list includes Bank of America, Countrywide Financial, Deutsche Bank, Bear Stearns, Citigroup, Merrill Lynch, Goldman Sachs, Wells Fargo, Morgan Stanley, IndyMac Bancorp, J.P. Morgan, and a host of eminent others. Deutsche Bank has the most mortgage mess: 4,750 foreclosures in the last four years. Mayor Jackson is putting a new spin on the suit game. Claiming banks and lenders in Cleveland created a massive public nuisance by doing the housing bubble do. As in, churning out foreclosure prone loans in order to fill tranches of profitable CDO.

Oh– did you hear the latest? Everyone, from the lowliest borrower to the largest investor, is joining a class action suit against God. In 2007, astronomers spotted a hitherto unseen planet circling a red dwarf star named Gliese 581. Apparently this planet can support human life. Folks are really pissed. The Big Guy wasn’t supposed to be making any more land…

Carola Von Hoffmannstahl-Solomonoff
Mondo QT

*“Merrill Lynch defends move,” Peter Goonan, The Republican, 12/30/07

Sources include but are not limited to:

“Merrill Lynch agents called,” Peter Goonan and Dan Ring, The Republican, 01/15/08

“Cleveland’s lawsuit against investment banks may prompt other cities to pursue action,” Henry J. Gomez, The Plain Dealer, 01/13/08

“Bank of America Buys Countrywide (Along With Its Lawsuits?)” Peter Lattman, Law Blog, wsj.com, 01/11/08

“Baltimore Sues Wells Fargo for Subprimes,” Ben Nuckles, Associated Press, 01/08/08

“Lawsuit by city targets lender,” John Fritze, Baltimore Sun, 01/08/08

“Springfield seeks loan extension,” Peter Goonan, The Republican, 01/03/08

“Astrobiology Top 10: Astronomers find Habitable Earth-Like Planet,” 01/02/08 www.astrobio.net

Finance Control Board, City of Springfield Massachusetts, Management’s Discussion and Analysis, 2006

Baltimore City Flipping and Predatory Lending Task Force, 2005 Final Report, Community Law Center, www.communitylaw.org

“New Information Shows Property Flipping in Baltimore Down 59% Since Last Year,” News From U.S. Senator Barbara A. Mikulski, 10/09/03

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