Watching A House of Cards, Part 1Housing-Market / Derivatives Dec 10, 2010 - 04:03 AM GMT
Nye Lavalle is best known for his sports predictions. With his family, he founded Sports Marketing Group and stunned many sportswriters with his accurate calls on the popularity of figure skating and NASCAR in the 1990s, among many others. Sixteen years ago, he began investigating mortgage fraud when a bank attempted to wrongfully foreclose on a family property. Many of the issues he uncovered more than a decade ago, like robosigning, are just being recognized today. He continues to try educate others about problems in the banking industry and the US economy.
Jennifer Barry: Could you tell me a little bit about how you got interested in the whole mortgage fraud and predatory lending?
Nye Lavalle: Sure. Just to give you an idea, my email, firstname.lastname@example.org, has been in existence, since about 1995.
JB: That’s a very long time.
NL: It all started the night my mom and dad Anthony and Matilde Pew owned a home in Dallas, Texas, that we used for our family business called Sports Marketing Group. And I had a place in New York and LA, and we were eventually going to retire to that home at first blush. But we purchased the home, and my family had money, and I had money, we were a business, and basically, soon after we closed on the loan, the bank SOA just started doing all sorts of stupid things. Nobody resided full-time in the home, and they were instructed to send the payment statements to Michigan so that they could get paid on time, and they never sent them there. They sent them to the property address and somebody wasn't on the property for sometimes two to three months. And they wouldn't change the address. They wouldn't take off the late fees, then when I would pay bills on time at the bank, it turned out that they would send the payments from the bank to California to the posting center, and they wouldn't get posted for 10 more days, even though you paid it on time at the bank. And then they would put another late fee onto the account.
Then, when we had insurance and we paid on a quarterly basis, they would send cancellation notices 30 days ahead. The bank would force place another insurance policy on the property even though we had our own insurance on it. And the long and short of it's all in a report I created called “Predatory Grizzly ‘Bear’ Attacks Innocent, Elderly, Poor, Minorities, Disabled & Disadvantaged!” They were just churning the account, just trying to make fees and money all over the place.
What we learned years later in litigation is that our account was red-flagged for fraud. The loan officer who approved the loan and did all the documentations had taken blank applications that my folks signed, and put as monthly income from my family, US$100,000 a month, when that was their annual trust income.
So they were trying to do what we call manufacture a default. A lot of servicers do that because they want to foreclose on the house. They want to get rid of the liability because that mortgage has been tainted or it becomes instead of A paper, B, C, or D paper.
It's called a scratch and dent mortgage.* It's kind of like a refrigerator, it gets that name kind of like from a refrigerator or stove at the store that somehow gets dented and damaged during transit, and it's not as valuable as the perfect condition new appliance.
NL: So after that we went to pay off the note. We go look, this is crazy, we don't want to do business with you, we just want to pay you off. They wouldn't meet with us. We asked for servicing records. They sent us records that made no sense. We offered to pay them in cash in 14 days on two conditions: that they could come up with records of what we actually owed them, it was about a $100,000 note, and that they could provide us the original note, stamped, cancelled and paid in full. I knew how banking worked because I had represented some banks. Well the servicing records they gave us, the year end balances were like $5,000 off, I mean literally. And they showed and proved our point that when we had insurance on the property, not only did they put one forced place policy on top of our insurance that we had, but they put two more on top of the one that they had, so they actually had three policies on top of each other.
NL: And that was just a mess. And it was really, they were cooking the books is what I learned. And when I got all the information and gave it to them and said look, we want to get rid of you, they assigned it to a company called EMC Mortgage, which was a unit of Bear Stearns. EMC initiated foreclosure, and we initiated a defense to that, and over the years they spent $2.5 million and 7 years in litigation on a $100,000 loan.
JB: Well, that seems crazy. I do have a quick question for you. Just to clarify, you said they were putting multiple insurance policies on the home, are you talking about derivatives or just regular insurance policies?
NL: No, it's not a form of a derivative. It was just a scam, it was called churning force placed insurance.* And those things have been sued upon and there have been class action lawsuits and settlements, but that's gone on for years and there are different variations of the scam. If you read my “Predatory Grizzly Bear” report it details all the predatory servicing schemes. I was the first one to coin that term in that report, I mean I coined it back in like the late '90s but the report was written between 1996 and 1999. It really was a lot of work to figure where all this money was going.
So that being said, what we learned in that process is that the bank cooked their books and they did it on the notes that they owned. I realized that if a family who is wealthy, who had money, could be treated this way, then God bless everyone else. What did that mean for our financial system?
JB: It’s very disturbing, because they were pushing you around and you could actually fight back, and you said they spent $2.5 million?
NL: Over $2.5 million, and the month before trial our law firm withdrew and we got a default judgment against us. It turned out our law firm was representing Bear Stearns and hadn't informed us of the relationship and banking interests. And we had paid them $75,000 and then capped their fees, and they racked up a $750,000 bill themselves.
JB: Wow. So why do you think that Bear Stearns spent that much money fighting over a property not worth nearly that much?
NL: I was the first to unravel what you're seeing now. The emperor had no clothes. They didn't own the note, they churned these properties, they double-pledged their notes sometimes. They had no right to the note, they had no right to foreclose, and they were cooking the books, all those things.
JB:. So you are saying that by making certain demands, you were uncovering fraud, and they needed to keep the fraud undercover, and $2.5 million was a very small price?
NL: It was a pittance for them to attack us with lawyers in comparison to what I discovered. Because what I discovered was connected to Fannie Mae. This was before the internet, so I had to travel all around the country looking for court files and making copies. There was no real internet at that time, or high speed internet way back then where we could post all these things. And I literally had to go and review court files all around the country and write to the courts and other things I did. The point is I found out it's the whole industry, it wasn't just Bear Stearns and EMC.
JB: You found out that that your case was the tip of the iceberg in what was going on.
NL: Right, exactly. And it all came down to securitization.
JB: I agree that securitization is a big part of the problem. Can you talk about what you see is the problem with derivatives, such as mortgage-backed securities and why the average homeowner should be concerned about that? How does it affect them?
NL: There are many problems. Everybody should be concerned, I mean, whether they're a homeowner or not, as a taxpayer it affects everything that we do. It affects our financial stability as a nation and our national security. It affects our property values, it affects the neighborhoods we live in, it affects the condominiums you might live in, and foreclosures, and people being able to pay HOA dues. It affects members of country clubs, where people walk away, while some of the other members have to pick up the $100,000 dues for the ex-members. It affects your life in more ways than you know. It affects title on property. It affects the cash flow that the nation needs to do its business, and pay for the services that we all need.
To me, the most important thing that nobody has really covered is how much of this junk was sold to our respective mutual, trust, insurance, and pension funds, the institutional investors. And so our retirement, besides social security being there when we retire, will our trust funds and will our mutual funds and annuities and other savings, the 401Ks be there when we retire? It's all of us are really the ultimate investors.
JB: That’s a big concern. I have a retired relative with a pension from GM. He worked there a long time, and I’m concerned because I don't know how long that pension is going to be around. Who knows what they invested in or didn't, or how well they're managing it? Most of these pension funds are under-funded anyway to start with.
NL: Right, and they're guaranteed by the government, the government fills the stop gap. So if you look at the total debt that the US has, which is in the trillions, that's one thing, but when you look at the total obligations that the US has guaranteed between pensions or banking, Fannie Mae, Freddie Mac, you see where I'm going, so it's a staggering number.
JB: I think Laurence Kotlikoff is putting it at $202 trillion right now. He wrote a book with Scott Burns from the Dallas Morning News about six years ago called The Coming Generational Storm and talking about how the US is broke.
NL: I was going to say it was over a hundred trillion, but I wouldn’t be surprised at that number. He's great, I like his work. Without independently auditing his numbers I couldn't confirm it, but I would definitely say that's in the ball park. But that's a number that nobody talks about very much.
JB: I agree, usually the news reports a much lower figure.
As far as those derivatives are concerned, I suspect that the mortgages have been sold many many times over. That’s another big problem.
NL: That's absolutely true. I can tell you that it's conclusively proven. I've had evidence of it, I've seen it happen, and I've been talking about that. It’s the trillion dollar scam - they pledged and hypothecated the mortgages* to multiple parties in addition to the trust. The mortgages never got to the trust that was supposed to hold them. We have evidence of this. Here's the real kicker though, the Federal Reserve and Federal Home Loan Banks actually have some of these mortgages because they were pledged to them in exchange for loans to the various banking institutions.
JB: Are you referring to the mortgage-backed securities, or the mortgages themselves?
NL: Not the securities, I'm talking about the mortgages themselves. A lot of times the banks need to borrow money for operations or whatever, and so they have to give collateral as well. That's why a lot of the notes endorsed are blank, they actually transferred the collateral files to the Fed, and the Fed actually holds the actual mortgage notes.
JB: So the paperwork is not signed so that they can easily swap it around, is that what you're referring to?
NL: Yes, the notes typically are endorsed in blank so that it becomes bearer paper. The the policy of Fannie Mae, Freddie Mae, even Ginnie Mae and most banks is that promissory notes are endorsed in blank, that's typical policy, so imagine trillions of dollars of negotiable paper just floating around out there. That's why it was funny in Florida when they said they lost a note, I would kind of laugh, how do you lose a two and a half million dollar note? That's like $2.5 million floating around somewhere.
This is the first segment of the interview. I will publish Part 2 in February 2011, as January is the annual review issue.
by Jennifer Barry
Global Asset Strategist
Copyright 2010 Jennifer Barry
In 2003, Jennifer started an online bullion dealership, becoming part of a select group in the new generation of bullion dealers. She ran the business successfully until 2007, closing it to focus on writing Global Asset Strategist, which grew out of her customer newsletter for the coin dealership. She takes pride in having guided her customers into silver near the bottom of the market. Those early customers have almost tripled their investment.
Jennifer was originally trained as a therapist, receiving a Bachelor of Arts in Psychology from Connecticut College, and a Master of Social Work from Simmons College in Boston. She worked as a licensed professional in human services for several years, until reading Ayn Rand's Atlas Shrugged, which motivated her to reject working to support the State. She left the field and taught herself Austrian Economics while working a series of positions in industry.
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