Investors who bought billions of residential mortgage securities from Bear Stearns have woken up to the fraud machine I’ve been reporting on at Bear and EMC all year. On Friday, a Texas legal firm made famous for negotiating an $8.5 billion settlement with Bank of America for rmbs investors, made a similar move on JP Morgan. Gibbs and Burns, who represents clients like Blackrock and PIMCO, sent a nasty warning letter to five banks who act as trustees for JP Morgan owned RMBS. They called for an investigation into breach of contracts and substandard servicing of these mortgage bonds.
The news hit every major paper because the number of bonds in question was $95 billion. And this was the first time we saw blind investors figure out who the other was to get a quorum together to fight JP Morgan. You see to get the trustee to actually do their job and make sure the loans in the mortgage security are what the bank said they are; you need at least 25% of the investors to complain. Well that’s happen now and as a result we see top mortgage industry analyst like Mark Hanson, sending warning notes out to clients about JP Morgan facing a mega billion payout over the sins of Bear’s Mortgage team run by Tom Marano.
Hanson wrote to clients yesterday:
“on the JPM $95bb MBS inquiry because I feel it will turn out unlike anything we have seen to date in MBS suits and settlement. In short, the various smaller monoline suits are blazing the way for the much larger MBS suits. My views seem draconian in nature relative to what we know in the Gibbs and Bruns / BAC $8.5bb settlement. But I think those using GSE or BAC math coming up with a few of billion dollars for JPM/Bear/WM MBS fraud will be disappointed.’
Anyone reading my reporting detailing things like EMC analyst being told to make up loan level detail to the raters — to newer news that outside due diligence firms like Clayton were told to ‘not find any bad loans’ when they prepared reports for Bear RMBS investors, knows the level of outright fraud was blatant. I agree with Hanson that $JPM can’t be compared to $BAC when trying to estimate how many billions of RMBS they will have to buy back because this isn’t a case of irresponsible underwriting from the likes of Countrywide – with Bear we have former EMC employees coming forward alledging out right cheating and lying.
Of the $95 billion of JP Morgan RMBS the trustees have to inspect, 47% were originated by Bear Stearns. In the monoline suits against Bear/JPM they’ve shown on average 50 percent of the loans were an early payment default and should be bought back. And then there is the issue of loans already in default before mortgage bonds were even sold. Securities like PRIME 2005 / PRIME 20007 are packed with loans from Puerto Rico. This is interesting because in August I reported a story at DealFlow Media detailing how EMC loan analysts went to their superior, David Hamilton, to complain the $500 million of loans Bear bought from a Puerto Rico bank were already in default. The story explains Hamilton sent the findings up to Tom Marano’s mortgage trading team at Bear and they said “don’t worry about it we’ll just swap them out latter.”
Then there is this little issue I reported on also at DealFlow this summer:
“In 2004, Bear decided to tap the short-term debt market for capital to expand its mortgage operations. To do this, Bear has to set aside some of the mortgages it already had booked as collateral in the RMBS, Van Leeuwen said.
“When the company first did this, it was a little hairy because a couple of times I remember a loan that would be designated for the funding, call is master funding, that was set aside as collateral for the sort-term debt was also sold into a security, so it was in two places at once”, he said. “But because it’s not regulated and nobody is really watching, you can do it quietly.
If Bear couldn’t cover the short-term debt payments, the servicer would have been in a mess trying to figure out who really owned the collateral.
Eventually, the decision from Marano’s mortgage group in New York was to forego the due diligence of wholesale loans that Bear was buying from banks like Countrywide and Wells Fargo, Van Leeuwen said.
Towards the end of 2005, Bear decided to buy the loans and then review them later. If there were problems, Bear would take the most obviously troubled loans out later, which, at least into the 2006 era, kept them from running afoul of customers. Yes, as Van Leeuwen argues, this also helped inflate the value of the MBS that Bear was selling.”
Now when the trustee goes back to ask JP Morgan about this it will be interesting to see if they can wiggle their way out of this apparent breach of reps and warranties. All the trustee has to do is start reading the discovery by New York law firm PBWT in the Ambac, Syncora, and Assured cases. It’s a dotted line to the fraud at Bear Stearns and even details some of the cover up JP Morgan has been doing since they realized they were sitting on a mountain of rmbs putback liability after they bought Bear Stearns.
But what’s really scary for JP Morgan is a loss causation motion in a RMBS putback suit against Bank of America. It’s in New York state court right now and Alison Frankel at Thomson Reuters legal news has written about its possible effects. If the New York Judge decides in the favor of the investors suing it could mean all they have to prove is a bank lied about some aspect of the collateral in the RMBS and that lie, weather it actually caused a loss, means the investors can argue they never would have bought the security. There are already quite a few documented lies in the putback lawsuits against Bear/JPM, which is why Mark Hanson is warning clients that every one of these inquiries and cases are unique and based on the monoline cases against Bear, they made Bank of America look like petty thieves.