Audit Notes: Foreclosure Mess, Wall Street, Dummies

The New York Observer’s Max Abelson has done some of the better reporting on How Wall Street Thinks. It’s “let them hang themselves with their own rope” reporting. I love that stuff.

As Abelson points out in a new piece, Wall Street’s collective shrug over the widening crisis reflects its own blinkered view on its role in creating the morass. Hey, what does wholesale disregard of property rights laws really matter? They’re “clerical errors”:

A former member of the Goldman Sachs management committee was not so sure. “Don’t you think, out of 10 million data points, there will be 500 unbelievably screwy examples? It’s a little bit so what,” he said on Tuesday. “I don’t get it. It doesn’t feel like this is fraud. Maybe there is sloppiness, but at the end of the day, people took out mortgages they can’t pay back. Now I worry that if anything, the government is making something that is just a clerical error into something that would be nefarious or whatever.”

If former member of the Goldman management committee thinks the government is raising Cain, wait till he gets a load of his bagholders… er, bondholders. Mike Konczal:

If more than 0.01% (!) of mortgage notes weren’t properly transferred, the trust can force the sponsor (in this case, Goldman Sachs) to repurchase the bad mortgages. And this is just one contract for one part of the ~$2.6 trillion dollar mortgage backed securities market. How’s that for systemic risk? Especially if this is found to be widespread…

Looking at the documents, you see that the smart guys who created these mortgage-backed securities put large poison pills into them to try and prevent the kind of note fraud we are currently experiencing. They took the policing and legal recourse (and legal ability to cover themselves) very seriously on this issue. So seriously they can force repurchases of this bad debt.

So don’t believe anyone who says these are just technicalities; the people who wrote the contract didn’t believe they were.

And of course, there’s no self-awareness from Wall Street that these guys’ pursuit of bigger bonuses in large part caused this whole mess: Both the over-lending part and the fly-by-night foreclosure part.

— Speaking of Konczal (aka Rortybomb), you really ought to read his series on the foreclosure scandal. He calls it Foreclosure Fraud for Dummies, and there are five parts. Read all of them:

1: The Chains and the Stakes

2: What is a Note, and Why is it So Important?

3: Why Are Servicers So Bad At Their Job?

4: How Could This Explode into a Systemic Crisis?

5: The Necessity of Government Action and Ways Out of The Crisis

— And speaking of Wall Street’s greed causing the overlending and foreclosure fraud, this morning I called for the press to focus on how the latter recalls and/or relates to the former.

The Huffington Post’s Arthur Delaney pointed out on Twitter that he did just that last week.

The bogus loans and bad foreclosure paperwork are both the result of Wall Street’s massive appetite for mortgages during the housing bubble, experts say, as banks repackaged mortgages as asset-backed securities and sold them to investors. As mortgages repeatedly changed hands, servicers in many instances lost track of who owned them. In states where foreclosures need a court’s approval, servicers now find themselves unable to prove they have a legal right to foreclose.

“The birth of the securitization concept has created both problems,” said Jim Kowalski, a foreclosure defense attorney in Florida. “It created a beast that needed to be fed at the front end with sloppy originated loans and a huge beast at the back end with those loans going through the foreclosure process.”

Good stuff. More like this, please.

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Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at Follow him on Twitter at @ryanchittum.