Saturday, October 9, 2010

Janet Tavakoli on the Mortgage Document Crisis

Ezra Klein at WaPo interviewed Janet Tavakoli about the developing mortgage document crisis:
Ezra Klein: What’s happening here? Why are we suddenly faced with a crisis that wasn’t apparent two weeks ago?

Janet Tavakoli: This is the biggest fraud in the history of the capital markets. And it’s not something that happened last week. It happened when these loans were originated, in some cases years ago. Loans have representations and warranties that have to be met. In the past, you had a certain period of time, 60 to 90 days, where you sort through these loans and, if they’re bad, you kick them back. If the documentation wasn’t correct, you’d kick it back. If you found the incomes of the buyers had been overstated, or the houses had been appraised at twice their worth, you’d kick it back. But that didn’t happen here. And it turned out there were loan files that were missing required documentation. Part of putting the deal together is that the securitization professional, and in this case that’s banks like Goldman Sachs and JP Morgan, has to watch for this stuff. It’s called perfecting the security, and it’s not optional.

EK: And how much danger are the banks themselves in?

JT: When we had the financial crisis, the first thing the banks did was run to Congress and ask for accounting relief. They asked to be able to avoid pricing this stuff at the price where people would buy them. So no one can tell you the size of the hole in these balance sheets. We’ve thrown a lot of money at it. TARP was just the tip of the iceberg. We’ve given them guarantees on debts, low-cost funding from the Fed. But a lot of these mortgages just cannot be saved. Had we acknowledged this problem in 2005, we could’ve cleaned it up for a few hundred billion dollars. But we didn’t. Banks were lying and committing fraud, and our regulators were covering them and so a bad problem has become a hellacious one.

EK: My understanding is that this now pits the banks against the investors they sold these products too. The investors are going to court to argue that the products were flawed and the banks need to take them back.

JT: Many investors now are waking up to the fact that they were defrauded. Even sophisticated investors. If you did your due diligence but material information was withheld, you can recover. It’ll be a case-by-by-case basis.

EK: Given that our financial system is still fragile, isn’t that a disaster for the economy? Will credit freeze again?

JT: I disagree. In order to make the financial system healthy, we need to recognize the extent of our losses and begin facing the fraud. Then the market will be trustworthy again and people will start to participate.
Bottom line: It is outrageous that the government continues to bailout these characters at both the mortgage origination level and the mortgage securitization level. If you are running a major financial institution which is doing billions in mortgage business, but you are doing so without your firm obtaining properly completed basic mortgage documents, then you have no competency to be running such a firm. Instead of bailing these bankers out, the government should issue these guys taxi hack licenses, so they can work at a job they might be able to succeed at.


  1. Ezra Klein: What’s happening here? Why are we suddenly faced with a crisis that wasn’t apparent two weeks ago?

    Ha! Maybe because "journalists" like you refuse to do your job, as you define it, and actually seek out the truth.

    This reminds me of the Hugh Hendry vs. Jeff Sachs debate, where Jeff said, "This wasn't even a problem until the last few weeks and now it's a 'crisis', nobody was worried about this before" and Hendry points out that he is literally on record, on a video, 18mos before the PIIGS crisis, predicting the crisis and how and why it would unfold.

    These people are clueless. What does Ezra Klein and his ilk pick up a paycheck for besides working hard everyday to keep people clueless and in the dark for the benefit of the power elite?

  2. Obama's Justice Department expressly stated it would only focus on fraud post meltdown, September 2008.

    For two years Tavakoli raised her concerns (alongside Wenzel) and Ezra Klein finally wakes up. Better late, than never.

  3. The TBTFW (too big to f*&% with) banks aren't afraid of lawsuits. They are ten steps ahead of everybody and they will come out smelling like a rose.

    They are crafting legislation that will be passed in the dead of night to protect them. They are scrambling to line everything up the way they want it passed by the lame duck Congress. Look for lots of "unanimous consent" votes - votes that can't be traced to individual lawmakers - between election day and the swearing in of the newly elected members of Congress.

  4. If you find yourself in outrage over this, please be honest with yourself. If you didn't vote for Ron Paul then you are part of the problem. He was the only 2008 presidental candidate who was not captured by the military industrial complex. Yes, you were duped as many others were. OK, the rest of us need to get over your foolishness in that matter. The real question is whether or not you learned anything from your mistake. The only way you can prove that you did is to vote the bums out and to vote honest people like Ron Paul, Rand Paul, Peter Schiff and others of their ilk in.

  5. This is SO RIGHT ON !!! The mortgage document crisis is PART of the biggest fraud in the history of the capital markets. It is part of, and an essential element of, the process of origination bogus loans without any underwriting standards at all, mischaracterizing the affordability and reasonableness of the loans and of the values of the underlying collateral (properties) to the borrowers, making numerous layers of completely bogus representations and warranties about the quality, character, soundness and lawfulness of the originations, the loans and the collateral to the ultimate investors, wrapping the whole mess in bogus, illegitimate and unjustified ratings, hard-wiring in multiple layers of conflicting interests, and then turning management of the whole stinking mess to mortgage servicers, outsourcers and foreclosure "factory" law firms who had little or no skin in the game, and who had tremendous incentives to mishandle the loans, the borrowers, collection and resolution, and to misrepresent the facts in order to make it appear that they were performing their contractual obligations when they were not, while extracting excessive, unwarranted and unreasonable profit from their breach of their fiduciary duty to their clients and their breach of their duty of good faith and fair dealing to the borrowers.

    The mess needs to be faced, the losses realized, the loans and properties discounted to realitic prices. There are many borrowers who are able and willing to pay, and who would be happy to pay if the price was realistic. This would save many families' homes, reduce the potential supply of foreclosed properties and stabilize real estate prices.

    There is no way to hide from this problem, it is not going to go away by itself, nor will the passage of time take care of it.

    It is erroneous to think that the exposing of this problem will 'interfere with the recovery'. It is the exact opposite. The "mortgage document crisis" provides a glimpse into the underlying void which the robosigners signing "fake documents" were designed to paper over and conceal. There can be no recovery until the problem is fully exposed and handled.

    The culprits should be prosecuted, not given more money to hide this horrific mess.