Showing posts with label Bear Stearns. Show all posts
Showing posts with label Bear Stearns. Show all posts

Monday, February 28, 2011

NEIL GARFIELD FINDS THE BEST HELP FOR HOMEOWNERS

ALLSTATE FILES SUIT LAYING OUT ALL THE ALLEGATIONS YOU NEED

Posted on February 24, 2011 by Neil Garfield

REQUIRED READING

2.24.2011 Chase -Allstate-Complaint

JUST LOOKING AT THE TABLE OF CONTENT WILL TELL YOU WHAT YOU NEED TO KNOW
NATURE OF ACTION …………………………………………………………………………………………………….1
PARTIES ………………………………………………………………………………………………………………………..7
JURISDICTION AND VENUE ……………………………………………………………………………………….16
BACKGROUND ……………………………………………………………………………………………………………17
A.    THE MECHANICS OF MORTGAGE SECURITIZATION …………………………………….17
B.    SECURITIZATION OF MORTGAGE LOANS: THE TRADITIONAL MODEL ……..19
C.    THE SYSTEMIC VIOLATION OF UNDERWRITING AND APPRAISAL STANDARDS IN THE MORTGAGE SECURITIZATION INDUSTRY …………………..21
D.    DEFENDANTS WERE AN INTEGRATED VERTICAL OPERATION CONTROLLING EVERY ASPECT OF THE SECURITIZATION PROCESS…………..24
(1)    JPMorgan Defendants……………………………………………………………………..24 (2)
WaMu Defendants ………………………………………………………………………….26 (3)
Bear Stearns Defendants ………………………………………………………………….27
E.    DEFENDANTS’ OFFERING MATERIALS…………………………………………………………..29 (1)
The JPMorgan Offerings………………………………………………………………….29 (2)
The WaMu Offerings………………………………………………………………………30 (3)
The Long-Beach Offering………………………………………………………………..32 (4)
The Bear Stearns Offerings………………………………………………………………32
SUBSTANTIVE ALLEGATIONS …………………………………………………………………………………..34
I.    THE OFFERING MATERIALS CONTAINED UNTRUE STATEMENTS OF MATERIAL FACT AND OMISSIONS ABOUT THE MORTGAGE ORIGINATORS’ UNDERWRITING STANDARDS AND PRACTICES, AND MATERIAL CHARACTERISTICS OF THE MORTGAGE LOAN POOLS ……………..34
A.    Defendants’ Misrepresentations Regarding Underwriting Standards And Practices …………………………………………………………………………………………………..34
(1)    JPMorgan Defendants’ Misrepresentations Regarding Underwriting Standards And Practices………………………………………………35
i
(2)    WaMu Defendants’ Misrepresentations Regarding Underwriting Standards and Practices……………………………………………………………………35
(3)    Long Beach Defendants’ Misrepresentations Regarding Underwriting Standards and Practices……………………………………………….36
(4)    Bear Stearns Defendants’ Misrepresentations Regarding Underwriting Standards and Practices……………………………………………….39
B.    Defendants’ Misrepresentations Regarding Owner-Occupancy Statistics …………40
(1)    JPMorgan Defendants’ Misrepresentations Regarding Owner- Occupancy Statistics ……………………………………………………………………….40
(2)    WaMu Defendants’ Misrepresentations Regarding Owner Occupancy Statistics ……………………………………………………………………….41
(3)    Bear Stearns Defendants’ Misrepresentations Regarding Owner Occupancy Statistics ……………………………………………………………………….41
C.    Defendants’ Misrepresentations Regarding Loan-to-Value and Combined Loan-to-Value Ratios…………………………………………………………………………………42
(1)    JPMorgan Defendants’ Misrepresentations Regarding LTV and CLTV Ratios………………………………………………………………………………….42
(2)    WaMu Defendants’ Misrepresentations Regarding LTV and CLTV Ratios ……………………………………………………………………………………………42
(3)    Bear Stearns Defendants’ Misrepresentations Regarding LTV and CLTV Ratios………………………………………………………………………………….43
D.    Defendants’ Misrepresentations Regarding Debt-to-Income Ratios …………………44
(1)    JPMorgan Defendants’ Misrepresentations Regarding Debt-to- Income Ratios …………………………….................…………………………………………………..44
(2)    WaMu Defendants’ Misrepresentations Regarding Debt-to-Income Ratios ……………………………………………………………………………………………44
(3)    Bear Stearns Defendants’ Misrepresentations Regarding Debt-to- Income Ratios ............................................................................................................................................45
E.    Defendants’ Misrepresentations Regarding Credit Ratings……………………………..46
(1)    JPMorgan Defendants’ Misrepresentations Regarding Credit Ratings ………………………………………………………………………………………….46
(2)    WaMu Defendants’ Misrepresentations Regarding Credit Ratings………..47 ii
(3)    Long Beach Defendants’ Misrepresentations Regarding Credit Ratings ………………………………………………………………………………………….48
(4)    Bear Stearns Defendants’ Misrepresentations Regarding Credit Ratings ………………………………………………………………………………………….48
F.    Defendants’ Misrepresentations Regarding Credit Enhancements……………………49
(1)    JPMorgan Defendants’ Misrepresentations Regarding Credit Enhancements ………………………………………………………………………………..49
(2)    WaMu Defendants’ Misrepresentations Regarding Credit Enhancements ………………………………………………………………………………..50
(3)    Long Beach Defendants’ Misrepresentations Regarding Credit Enhancements ………………………………………………………………………………..50
(4)    Bear Stearns Defendants’ Misrepresentations Regarding Credit Enhancements ………………………………………………………………………………..51
G.    Defendants’ Misrepresentations Regarding Underwriting Exceptions………………51
(1)    JPMorgan Defendants’ Misrepresentations Regarding Underwriting Exceptions …………………………………………………………………51
(2)    WaMu Defendants’ Misrepresentations Regarding Underwriting Exceptions ……………………………………………………………………………………..52
(3)    Long Beach Defendants’ Misrepresentations Regarding Underwriting Exceptions …………………………………………………………………53
(4)    Bear Stearns Defendants’ Misrepresentations Regarding Underwriting Exceptions …………………………………………………………………53
H.    Defendants’ Misrepresentations Regarding Alternative Documentation Loans ……………………………………………………………………………………………………….53
(1)    JPMorgan Defendants’ Misrepresentations Regarding Alternative Documentation Loans ……………………………………………………………………..54
(2)    WaMu Defendants’ Misrepresentations Regarding Alternative Documentation Loans ……………………………………………………………………..54
(3)    Bear Stearns Defendants’ Misrepresentations Regarding Alternative Documentation Loans …………………………………………………….55
I.    Defendants’ Misrepresentations Regarding Full-Documentation Loans……………55
iii
J.    Defendants’ Misrepresentations Regarding Adverse Selection of Mortgage Loans ……………………………………………………………………………………………………….56
K.    Defendants’ Failure to Disclose the Negative Results of Due Diligence …………..57
II.    ALL OF DEFENDANTS’ REPRESENTATIONS WERE UNTRUE AND MISLEADING BECAUSE DEFENDANTS SYSTEMATICALLY IGNORED THEIR OWN UNDERWRITING GUIDELINES ……………………………………………………58
A.    Evidence Demonstrates Defendants’ Underwriting Abandonment: High Default Rates And Plummeting Credit Ratings ……………………………………………..59
B.    Statistical Evidence of Faulty Underwriting: Borrowers Did Not Actually Occupy The Mortgaged Properties As Represented……………………………………….62
(1)    The JPMorgan Offerings………………………………………………………………….64 (2)
The WaMu Offerings………………………………………………………………………64 (3)
The Bear Stearns Offerings………………………………………………………………65
C.    Statistical Evidence of Faulty Underwriting: The Loan-to-Value Ratios In The Offering Materials Were Inaccurate ………………………………………………………65
(1)    The JPMorgan Offerings………………………………………………………………….66 (2)    T
he WaMu Offerings………………………………………………………………………68 (3)
The Bear Stearns Offerings………………………………………………………………71
D.    Other Statistical Evidence Demonstrates That The Problems In Defendants’ Loans Were Tied To Underwriting Guideline Abandonment………..72
E.    Evidence Demonstrates That Credit Ratings Were A Garbage-In, Garbage-Out Process …………………………………………………………………………………75
F.    Evidence From Defendants’ Own Documents And Former Employees Demonstrates That The Representations In Defendants’ Offering Materials Were False ……………………………………………………………………………………………….76
(1)    The JPMorgan Offerings………………………………………………………………….76 (2)
The WaMu Offerings………………………………………………………………………80 (3)
The Long Beach Offerings……………………………………………………………….87 (4)
The Bear Stearns Offerings………………………………………………………………92
iv
G.    Evidence From Defendants’ Third-Party Due Diligence Firm Demonstrates That Defendants Were Originating Defective Loans………………….94
H.    Evidence Of Other Investigations Demonstrates The Falsity Of Defendants’ Representations ………………………………………………………………………97
(1)    The WaMu and Long Beach Offerings………………………………………………97
(2)    The Bear Stearns Offerings………………………………………………………………99
III.    DEFENDANTS’ REPRESENTATIONS CONCERNING UNAFFILIATED ORIGINATORS’ UNDERWRITING GUIDELINES WERE ALSO FALSE ……………102
A.    Countrywide ……………………………………………………………………………………………104
(1)    Defendants’ Misrepresentations Concerning Countrywide’s Underwriting Practices…………………………………………………………………..104
(2)    These Representations Were Untrue And Misleading………………………..105 B.
GreenPoint ……………………………………………………………………………………………..109
(1)    Defendants’ Misrepresentations Concerning GreenPoint’s Underwriting Practices…………………………………………………………………..109
(2)    These Representations Were Untrue And Misleading………………………..111 C.    PHH……………………………………………………………………………………………………….115
(1)    Defendants’ Misrepresentations Concerning PHH’s Underwriting Practices ………………………………………………………………………………………115
(2)    These Representations Were Untrue And Misleading………………………..116 D.
Option One……………………………………………………………………………………………..118
(1)    Defendants’ Misrepresentations Concerning Option One’s Underwriting Practices…………………………………………………………………..118
(2)    These Representations Were Untrue and Misleading:………………………..120 E.    Fremont ………………………………………………………………………………………………….122
(1)    Defendants’ Misrepresentations Concerning Fremont’s Underwriting Practices…………………………………………………………………..122
(2)    These Representations Were Untrue and Misleading…………………………124 IV.
THE DEFENDANTS KNEW THEIR REPRESENTATIONS WERE FALSE ………….126
v
A.    The Statistical Evidence Is Itself Persuasive Evidence Defendants Knew Or Recklessly Disregarded The Falsity Of Their Representations………………….126
B.    Evidence From Third Party Due Diligence Firms Demonstrates That Defendants Knew Defective Loans Were Being Securitized …………………………127
C.    Evidence Of Defendants’ Influence Over The Appraisal Process Demonstrates That Defendants Knew The Appraisals Were Falsely Inflated …………………………………………………………………………………………………..130
D.    Evidence Of Internal Documents And Former Employee Testimony Demonstrates That Defendants Knew Their Representations Were False ……….131
(1) (2) (3) (4)
JPMorgan Defendants Knew Their Representations Were False…………131 WaMu Defendants Knew Their Representations Were False ……………..133 Long Beach Defendants Knew Their Representations Were False………138 Bear Stearns Defendants Knew Their Representations Were False ……..140
V.    ALLSTATE’S DETRIMENTAL RELIANCE AND DAMAGES ……………………………144
VI.    TOLLING OF THE SECURITIES ACT OF 1933 CLAIMS …………………………………..146
FIRST CAUSE OF ACTION …………………………………………………………………………………………149
SECOND CAUSE OF ACTION …………………………………………………………………………………….150
THIRD CAUSE OF ACTION………………………………………………………………………………………..152
FOURTH CAUSE OF ACTION …………………………………………………………………………………….155
FIFTH CAUSE OF ACTION …………………………………………………………………………………………157
PRAYER FOR RELIEF ………………………………………………………………………………………………..157
JURY TRIAL DEMANDED……………………………………………


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Tuesday, February 1, 2011

BRILLIANT COMMENT FROM MARY COCHRANE WITH SAVE AMERICA ONE MORTGAGE AT A TIME! THANK YOU, MARY...VERY ENLIGHTENING, INDEED!!

SAVE AMERICA
ONE MORTGAGE AT A TIME
by Mary Cochrane
Tuesday, February 1, 2011 at 9:50 PM

Kelly keep up the great effort to Save America One Mortgage At A Time. This comment relates to Bear Stearns who provided a no-cost loan on 2nd mortgage originated by Wells Fargo Bank NA dba (Investor) c/o Wells Fargo Asset Securities Corp f/k/a Norwest Asset Securities Corp (NASCOR) in former Agreements with Bear Stearns.

My Loan Origination Fraud reveals the primary mortgage sold in secret by Wells Fargo Bank NA to Deutsche Bank Securities who purchased the promissory note.

The Remitter Ordered by WFHM. 6/5/06. We did not see the mortgage documents until evening of 6/7/06 PM. We did not know WFHM NJ employees ordered closing with forged signatures. I secured copies of the closing documents for originations from the Attorney for Wells Fargo Bank NA the 'Originator' of the 80/20 Mortgage, documents which include Remitter and Ref# reveals loan number of my first mortgage.

Remitter is top half of Cashier's Check. I placed a copy on http://www.saveamericaone.com

While researching fraudulent acts involved in the purchase of the first mortgage WFMBS 2006-10 and WFHMBS 2006-AR10 (Investors have in litigation a whole slew of related transactions).
Wells Fargo clearly states conveyance of mortgages in Agreements in which HSBC National Bank Trustee for transactions with investor Deutsche Bank Securities.

Wells Fargo used MIN# on 2nd Mortgage Southstar Funding LLC.
Wells Fargo lied to OCC stating they had nothing to do with origination. Selling Origination to second party after first selling the promissory note and not recording lawfully the mortgage and once the note separated from the mortgage, converted to a securities can't be converted back.

Same attorney representing Wells Fargo in New Jersey Diane Bettino REED Smith is the Attorney representing the litigation for Wells Fargo V. our foreclosure.

Wells Fargo sold in secret origination of second mortgage.

Bear Stearns provided no-cost-loan. Wells Fargo Title for Lender - Star Mortgage Services. In NJ, Capital Home Mortgage dba Southstar Funding LLC

The documents given to consumers are what the servicer wants you to see and does not include the originations. The omissions are substantive.

Mary_Cochrane@saveamericaone.com
http://www.saveamericaone.com
Linkedin Mary Cochrane Wells Fargo
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Do you have any robo-signer named C. FETNER, CATHY FETNER or CATHERINE FETNER in your database or in documents you’ve seen?

FDIC eagle seal in the main lobby of the headq...Image via Wikipedia
FROM OUR HARVARD FRIEND: WHAT ABOUT LEHMAN?
Posted on February 1, 2011 by Neil Garfield

This Maryland class action ruling requires Lenders to file new foreclosure suits under new statutes that require mediation, modification and other remediation attempts.


The class action in Massachusetts resumes with the SJC Ibanez ruling.

QUESTION:
Do you have any robo-signer named C. FETNER, CATHY FETNER or CATHERINE FETNER in your database or in documents you’ve seen? Fetner signed as a principal at Hanover Capital Partners for WAMU (where later she was Risk Manager), and Edison Decisioning (sharing same address as Hanover Capital) in Edison, NJ. She may have been involved in creating or spinning off ALLON HILL (a “due diligence” firm which sprang up when gaps in assignment chains needed filling). Her specialty seems to have been “due diligence” which we take to now mean fabricating documents to fill in the gaps in these assignment chains. She is currently at JPM Chase. In one document we first examined four years ago, Cathy Fetner’s signature (in NJ) appears on an assignment from Bank United to WAMU dated the day of the Miami closing. The law mill that proffered this fake additional document did so AFTER WAMU became part of JPMChase. US Bank National Association became trustee of of SASCO 5 RF 5, the fund that supposedly contained the loan in question when it was still at Lehman Brothers. There was no mention of Lehman Brothers on any assignment. The judge in Miami asked “so what?” when this and other frauds and forgeries were brought to her attention. PLEASE PASS THIS QUESTION ON.


RSVP


Spread the word


Filed under: bubble, CDO, CORRUPTION, currency, Eviction, foreclosure, GTC | Honor, Investor, Mortgage, securities fraud
« MATT WEIDNER POSES GOOD QUESTION How Do You Modify A 2-Party Contract With Only 1 Party Present? HAMP! »
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9 Responses

leapfrog, on February 1, 2011 at 4:29 pm said:

Frustrated to the hilt: I remember reading M. Soliman’s comments that MERS is the actual break in the chain. Here is the quote I have saved from him in Word format, as I think it is so important…I don’t understand everything he says, but this may be a gem!

“The break in the chain of title is actually the registration with MERS. You cannot register a security and have a recorded assignment – its dual consideration and that’s a fraud.”
M.Soliman
expert.witness@live.com

Comments in article here on LL: “Reports Coming in That BOA Will Buy AIG to Hide The Transactions”

Ian, on February 1, 2011 at 3:44 pm said:

EMC mortgage is a servicer and former lender owned by Bear Stearns. Also BNC Mortgage was owned by Bear Stearns. They also owned Encore Credit Receivables Trusts, held by CWABs.(Countrywide). In all the suits filed against CW, some of their dealings with EMC are coming to light in the courts. So now the shadow players are changing the named investors on MERS site from EMC to Encore Credit. None of these trusts have reported in 3 or so years in the SEC docs, and I haven’t found any 15Ds filed. Can anyone add to this? Thanks-

dave, on February 1, 2011 at 3:31 pm said:

to clarify an issue, catherine fetner was appointed pursuant to a power of attorney to act as poa for fdic, problem is all these 15k + assignments were purportedly executed and acknowledged march 21, 2002, and effective dec 31, 2001, when according to the trusts, the assignments were years earlier, these were special made assignments by the fdic, pusuant to the sale of the servicing rights to emc mortgage, problem is they all are frauds.

DyingTruth, on February 1, 2011 at 11:21 am said:

dave,
FDIC!?! That’s some damning evidence, for her and the FDIC.

dave, on February 1, 2011 at 8:30 am said:

I have assignments of mortgage from catherine fetner, purporting she is senior vice president of emc mortgage corp! she was also a power of attorney for the fdic, ( and a notary) when fdic sold the servicing rights of the superior bank mortgages to emc mortgage, she and others poas purportedly executed and notarized tens of thousands of mortgages all on one date march 21, 2002! Further her signature varies on the documents, suggesting she did not sign them, further some of these mortgage were not recorded until years later, after the poa from fdic expired, in my case the persons who signed my assignments signed thousands of others all on the same day, i have reviewed over 12k assignment of these assignments of mortgage, the ones signed by ms fetner were usually recorded years later ie 2004-2007, suggesting they were not executed on march 21, 2002, as purported on the assignments. also they were witnessed by 15 different people! of course this is not possible, i doubt if these people were even employess of hanover on march 21, 2002! I have lots of documentation includung copies of ms fetner’s signature, ( assignments) she is nothing but a fraudster, i would be happy to share info, email me a gobb@ptd.net. further, as she was a new jersey notary, a complaint to new jersey notary comm. would be appropiate, also consider that these assignments were prepared by another notary ( ies) namely marileen bradlee, donna graves, I believe new jersey has a law forbidding notaries from preparing legal documents. hope to hear from you!

frustrated to the hilt, on February 1, 2011 at 7:37 am said:

I am facing a similar situation with a now defunct pretender lender, which had the loan table funded, no proper disclosures, other than their own BK filing indicating their practice of selling the loans prior to settlement for 103% OF THE LOANED AMOUNT.

The closing instructions mention Aurora Loan Servicing and Lehman as the new servicer and what appears to be Investor. Lehman went bust, this pretender went bust also. Now three years later the liquidating BK trustee is coming forward with what appears to be the original note with a blank endorsement made by them to collect on a loan that has in all appearances and purposes been paid in full to them prior to settlement, but we have no proof other than their BK filing and the closing instructions. It seems we are in limbo here, and they have the winning hand, even if that means a crooked winning hand.

We are sure the judge is going to rule on their favor, only because of the fact that they have not mentioned any trusts, nor have there been any assignments on the land records, and MERS is on the deed of trust. I did the securitization analysis, however, the actual trust could not be located. Why would a pretender lender do a blank endorsement on a note if it was not to sell it to some one or to have sold it prior to funding?

Any comments and suggestions?, I understand no one can provide legal advice, what I am looking for is to expand my horizons!!!

This case has been a nightmare for the last two years or so. How can you fight them when they refuse to give you the info and when they are lying all the way to the bank!!!!

I forgot to mention that this case is in VIRGINIA!!!!, where you can get foreclosed by the pretender lenders by almost showing up a picture of your house and claiming they lent you the money!!!.

Mary, on February 1, 2011 at 7:05 am said:

So if in Maryland they have to refile the foreclosure suits . Will all the homeowners that went through this in 2009 be notified of a new foreclosure or will it all just be refiled and swept under the rug? What about the homes that were already bought will they have to give up that home. This is truely a disaster all around and so many questions and no answers. Fortunatly my home is still standing empty and owned by the bank with a reality comp. handleing the sale. Altisource bought it. But my big question is will we the homeowners that already went through the illegal foreclosure because the courts did not examine all the paperwork have to go through this AGAIN???

Rabi, on February 1, 2011 at 5:34 am said:

“So what……..” Hmmmm. Not surprised, they are more corrupt in Florida and Miami in particular. All you have to do is understand the politics down here to understand why. Remember the 1980′s with the drug cartels when officers of the law went to jail for consorting with criminals?. Now it’s consorting with banksters .Banana republic pretending to be cosmopolitan. “So what” …… truly amazing.

DyingTruth, on February 1, 2011 at 3:46 am said:

All she cares about is her retirement, which she’ll lose shortly after she’s let everyone’s houses be illegally taken from them. Ask her if she thinks her pension fund, which holds billions of worthless securities will be able to pay the legal fees associated with defending RICO charges.
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Monday, January 31, 2011

I CAN'T WAIT TO SEE HOW WELLS FARGO RESPONDS TO ALL THE LAWSUITS FILED AGAINST THEM AFTER EMC REVEALS ITS LOAN FILES, WELLS FARGO YOU WILL NOT BE IN THE CLEAR, AND WILL YOU THEN START RESPONDING TO YOUR OWN PLAINTIFF'S REQUESTS TO SEE YOUR LOAN FILES?

Did Bear Stearns Know Its Mortgage Securities Were a House of Cards?
By ABIGAIL FIELD
Posted 9:15 AM 01/28/11 Company News, Columns, Economy, Investing, JP Morgan Chase, Wells Fargo & Co, Real Estate, Credit, Investment
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This week, a lawsuit filed against Bank of America detailed the worst mortgage practices at Countrywide -- which BofA acquired in 2008. The suit charged that Countrywide had, as a policy, disregarded borrowers' ability to repay their loans because fraudulently securitizing the mortgages was the bank's sole purpose in making them. But Bank of America (BAC) isn't the only major financial institution now facing a legal battle over the past behavior of a company acquired during the financial meltdown.

A lawsuit filed by Wells Fargo against JPMorgan Chase (JPM) unit EMC Mortgage Corp. last week should force Chase to reveal if the conduct of the bank it purchased -- Bear Stearns -- was as bad as or worse than Countrywide's, as another lawsuit alleges. Based on the filings, Bear and its EMC subsidiary behaved remarkably like Countrywide, ignoring the quality of loans in order to create an ever-larger quantity of toxic mortgaged-backed securities.

Wells Fargo (WFC) is the trustee for a trust that issued mortgaged-backed securities built from loans it bought from EMC. That give Wells the right to look at the documents for each of the 2,049 mortgages backing the securities. But after a year of requests to see the loan files, EMC has yet to turn over a single one, which begs the question: Does EMC have something to hide?

Show Us the Documents

A lawyer for a major investor in the securities has already looked at about 1,300 of the 2,049 mortgages, and found 938 of them appeared to violate the representations and warranties made about them. In other words, the mortgages were worse than promised. If that's the case, Wells should be able to force EMC to buy them back -- hence, its requests, and now its lawsuit, demanding to review the files.

How could it be that 70% of the mortgages reviewed so far allegedly violate the securitization contracts' promises regarding mortgage loan quality? An earlier lawsuit filed by securities insurer Ambac (ABK) gives some insight into that question. According to that suit, and the myriad documents it cites in support, EMC/Bear knowingly purchased risky loans made to borrowers who couldn't repay them and packaged those loans into securities while lying about their quality.

Here are some of the highlights of Ambac's charges.

Bear Stearns Knew Loans Didn't Pass Muster

Ambac charges that Bear knew the loans were bad, pointing out that Bear knowingly hired inept firms to review and monitor loan quality. Then, when the "due diligence" companies did flag loans as bad, Bear overrode their decisions more than half of the time. Still worse, the suit says:
Bear Stearns ignored the proposals made by the head of its due diligence department in May 2005 to track the override decisions and instead took the opposite tack, adopting an internal policy that directed its due diligence managers to delete the communications with its due diligence firms leading to its final loan purchase decisions, thereby eliminating the audit trail.
Note that this isn't just a bare allegation by Ambac. Its complaint includes a footnote explaining that this information comes from two sworn depositions.

The suit also notes that by 2007 Bear still hadn't implemented a due-diligence overhaul designed to improve loan quality that was first proposed in 2005. In fact, it moved in the other direction. The suit explains, Bear "issued a directive in early 2005 to reduce the due diligence 'in order to make us more competitive on bids with larger sub-prime sellers.'"

The suit sums up Bear's motive this way: "Bear Stearns disregarded loan quality to appease its trading desk's ever increasing demand for loans to securitize."

One telling sign, according to the suit, that Bear knew how bad the loans were: Without telling investors or bond insurers like Ambac, Bear deviated from its policies on holding onto loans before selling them. Depending on the deal or underlying loan type, Bear had a policy of holding onto the loans for a period ranging from 30 to 90 days. But once it realized how poor the loans were, it kept the policy in place on paper but violated it routinely by securitizing them earlier.

Loans So Bad Bear Didn't Want to Know

In fact, the suit claims Bear would not only securitize those loans but would also go after the companies that sold the loans to Bear in the first place, settling with them in secret. Bear apparently had two departments dedicated to getting paid back for the bad loans, despite the fact that it had already securitized them. And the volume of bad loans grew so much that the departments became overwhelmed. "By mid-2006," the suit notes, "Bear Stearns' repurchase claims against the suppliers had risen to alarming levels, prompting warnings from its external auditors and counsel" that Bear was breaching its contracts.

Indeed, the deal manager for one 2006 securitization was clear about the incredibly poor quality of the underlying loans, referring to the deal when emailing Bear's trading desk as a "shit breather" and "a SACK OF SHIT."

Things got so bad that in 2007 Bear stopped wanting to know about loan quality, the suit says. Citing a deposition, Ambac charges that Bear told its employees to simply stop reviewing certain loan files and just securitize them. And not just any loan flies -- the instruction to stop reviewing applied specifically to mortgages Bear had already purchased from lenders whose standards were so poor that Bear wouldn't buy any more from them.

You read that right: Bear knew some lenders were making such risky mortgages that it would no longer buy from them, but rather than risk getting stuck holding the loans it had already bought from them, it securitized those loans while purposely not reviewing their quality -- or so the evidence cited by the lawsuit says.

Threatening Ratings Agencies

The lawsuit also makes charges regarding Bear's efforts to keep the crappy quality of the loans hidden. One claim is that in 2007, the company threatened the ratings agencies that were downgrading Bear's mortgage-backed securities, saying it would withhold "every fee" owed to the agencies because of downgrades. Ambac also provides details of how Bear finally started reviewing its files and found that many of the mortgages in its securities violated the promised quality standards -- but didn't tell anyone about it.


When Ambac was able to review 695 loan files across several deals it insured, it discovered that 80% of the loans were bad. (To date, the suit later notes, Ambac has reviewed 6,309 loans and found that 5,724 of them violated one or more of Bear's promises about loan quality: an even worse 91% rate.)

Bear rejected Ambac's requests that it repurchase the bad loans and instead implemented a trading strategy of betting against Ambac. Think about that. According to Ambac, Bear knowingly securitized bad loans, conned Ambac into insuring the deals, refused to buy back the bad loans when Ambac discovered them, and then bet against Ambac's survival. Pretty cold.

Ambac contends JPMorgan Chase kept up these tactics of concealing bad loans and refusing to buy back ones that were discovered in order to keep its balance sheet pretty, saying JP Morgan "effectively engaged in accounting fraud."

All About Executive Pay?

Why did Bear deliberately purchase and securitize such horrible loans according to the complaint? Because its executives' pay depended on it. The securitization machine was led by 10 executives -- also defendants in the suit -- the top four of whom made a combined $1 billion in the years preceding Bear's 2008 collapse.

The 162-page complaint goes into great detail about the particular lies Bear and then JPMorgan allegedly told, and how investors -- and Ambac, as the insurer -- have been hurt by them. Reading the filing clearly illuminates how much of a threat to the big banks their mortgage-backed securities may be.

It also underscores exactly why EMC is apparently stonewalling Wells Fargo's efforts to look at its loan files. I can't wait to see how EMC responds to the Wells Fargo suit.

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