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Justice Department Confirms FCIC Referrals, Which Appear Related to Lack of Disclosure on Mortgage Bonds

The Justice Department has confirmed that they have received criminal referrals from the Financial Crisis Inquiry Commission, but would not confirm how many referrals, how they will handle them, or what the timeline would be for any future actions. Justice Department Spokeswoman Elisa Spinelli said that the agency generally is not able to confirm or deny the existence of an investigation, but said that they take any information regarding potential violations seriously, and will subject them to a review.

Shahien Nasiripour suggests that the referrals from FCIC probably have something to do with securitization:

Wall Street firms that sold mortgage-backed securities appear to have violated federal securities laws by misleading investors on the quality of the underlying mortgages, a bipartisan panel created by Congress to investigate the root causes of the financial crisis concluded.

Banks that sold home loan bonds often didn’t disclose key details that would have helped investors accurately judge the quality of the investments. For example, investors were rarely told whether the mortgages failed to meet the banks’ own standards.

That failure raises “the question of whether the disclosures were materially misleading, in violation of the securities laws,” the panel said.

While Nasiripour hints that this aspect of the crisis has been largely ignored, it certainly has not by investors, who have been putting together teams to force repurchases of the bad securities for well over a year. And ever since the FCIC revealed the experience of Clayton Holdings, the third-party due diligence shop which found large percentages of mortgages they sampled for MBS deals to be inadequate, which the too big to fail banks ignored and still placed in their deals, the angry investors have been growing in numbers.

As Adam Levitin notes, the mother of all of these lawsuits was just dropped recently:

And so it begins. We’re about to witness the main event in financial institution internecine warefare: investment funds (MBS buyers) vs. banks (MBS sellers) […]

And now we have the first A-list litigation. We have TIAA-CREF, New York Life, and Dexia suing Countrywide (and assorted other defendants). And it alleges invalid chain of title–the mortgage-backed securities are actually non-mortgage backed securities!

The complaint only alleges chain of title problems based on Kemp v. Countrywide, really as a tag-on, and doesn’t show a lot of thought on the issue, but that’s enough for the genie to be out of the bottle. Yup. They went there.

As I’ve blogged previously, there are a variety of potential chain of title problems. Some relate to the mortgage, some to the note. Some are generic legal problems, while others are execution problems. What is alleged in this suit is an execution problem, albeit one that seems to be the case for all Countrywide deals.

I don’t think we’ll ever see the banks admit that there’s a problem on chain of title until the whole thing blows up (and why would they admit to such a thing), but as this suit makes clear, it’s not just wild-eyed law professors and consumer attorneys (and the Massachusetts Supreme Judicial Court) that think there’s a problem. The Street is starting to think so too, and the momentum in this area is only like to pick up.

Levitin adds that trustees are finally starting to sue the servicers to hand over the loan files.

The FCIC report may or may not help the investors in their efforts, but the evidence uncovered falls along a continuum, which future investigations and discovery will only enhance.

This is where the action will happen. I don’t have a whole lot of trust that the Justice Department referrals will end with criminal sanctions, and even the civil cases would be settled for pennies on the dollar. The FCIC doesn’t use the word crime, and I don’t see the Justice Department using it either. They are part of the same family of elites who believe that the system can fix itself, rather than the idea that they need to rid the system of the bad actors who committed crimes.

But whether the investors believe in crimes or not, they definitely want their money. And they have a claim, more credible every day, to do so. It’s a claim which could set the financial system into chaos. Still.

CommunityThe Bullpen

Justice Department Confirms FCIC Referrals, Which Appear Related to Lack of Disclosure on Mortgage Bonds

The Justice Department has confirmed that they have received criminal referrals from the Financial Crisis Inquiry Commission, but would not confirm how many referrals, how they will handle them, or what the timeline would be for any future actions. Justice Department Spokeswoman Elisa Spinelli said that the agency generally is not able to confirm or deny the existence of an investigation, but said that they take any information regarding potential violations seriously, and will subject them to a review.

Shahien Nasiripour suggests that the referrals from FCIC probably have something to do with securitization:

Wall Street firms that sold mortgage-backed securities appear to have violated federal securities laws by misleading investors on the quality of the underlying mortgages, a bipartisan panel created by Congress to investigate the root causes of the financial crisis concluded.

Banks that sold home loan bonds often didn’t disclose key details that would have helped investors accurately judge the quality of the investments. For example, investors were rarely told whether the mortgages failed to meet the banks’ own standards.

That failure raises “the question of whether the disclosures were materially misleading, in violation of the securities laws,” the panel said.

While Nasiripour hints that this aspect of the crisis has been largely ignored, it certainly has not by investors, who have been putting together teams to force repurchases of the bad securities for well over a year. And ever since the FCIC revealed the experience of Clayton Holdings, the third-party due diligence shop which found large percentages of mortgages they sampled for MBS deals to be inadequate, which the too big to fail banks ignored and still placed in their deals, the angry investors have been growing in numbers.

As Adam Levitin notes, the mother of all of these lawsuits was just dropped recently:

And so it begins. We’re about to witness the main event in financial institution internecine warefare: investment funds (MBS buyers) vs. banks (MBS sellers) […]

And now we have the first A-list litigation. We have TIAA-CREF, New York Life, and Dexia suing Countrywide (and assorted other defendants). And it alleges invalid chain of title–the mortgage-backed securities are actually non-mortgage backed securities!

The complaint only alleges chain of title problems based on Kemp v. Countrywide, really as a tag-on, and doesn’t show a lot of thought on the issue, but that’s enough for the genie to be out of the bottle. Yup. They went there.

As I’ve blogged previously, there are a variety of potential chain of title problems. Some relate to the mortgage, some to the note. Some are generic legal problems, while others are execution problems. What is alleged in this suit is an execution problem, albeit one that seems to be the case for all Countrywide deals.

I don’t think we’ll ever see the banks admit that there’s a problem on chain of title until the whole thing blows up (and why would they admit to such a thing), but as this suit makes clear, it’s not just wild-eyed law professors and consumer attorneys (and the Massachusetts Supreme Judicial Court) that think there’s a problem. The Street is starting to think so too, and the momentum in this area is only like to pick up.

Levitin adds that trustees are finally starting to sue the servicers to hand over the loan files.

The FCIC report may or may not help the investors in their efforts, but the evidence uncovered falls along a continuum, which future investigations and discovery will only enhance.

This is where the action will happen. I don’t have a whole lot of trust that the Justice Department referrals will end with criminal sanctions, and even the civil cases would be settled for pennies on the dollar. The FCIC doesn’t use the word crime, and I don’t see the Justice Department using it either. They are part of the same family of elites who believe that the system can fix itself, rather than the idea that they need to rid the system of the bad actors who committed crimes.

But whether the investors believe in crimes or not, they definitely want their money. And they have a claim, more credible every day, to do so. It’s a claim which could set the financial system into chaos. Still.

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David Dayen

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