Great Leap Forward


In the last couple of weeks I’ve been pushing foreclosure fraud. Well, not pushing the fraud but rather arguing that foreclosure is fraud. It has to be. If a mortgage was registered at MERS, then the chain of title was broken. Broken chains mean the bank cannot foreclose. But that was MERS’s business model, and so most mortgages are “infected”. Still, there’s a lot more to it than that.

I’ve been arguing since early on in the crisis that the entire real estate food chain is like Shrek’s onion—as you peel back every layer you find fraud. From the appraiser to the broker, from the lender to the securitizer, from the recording of the mortgage sales to the securitization’s trustees, from the accounting firms that signed off on everything to the ratings agencies that rated everything AAA, from the investment banks that created CDOs to the hedge fund managers who bet against the synthetics Goldman sold to its own customers, and from the bank lawyers to the judges that help banks steal homes. The whole damned onion is fraud.

And most of it, today, is to cover up the chain of fraud that dates back to the early 2000s. It has been all fraud, all the time, since 2000.

As is widely noted, the FBI warned of an epidemic of fraud in 2004. The Fed’s FOMC discussed rising fraud even before that. While anecdotal evidence, alone, should not be enough to convince one, there is certainly plenty of it. Today I want to talk briefly about a couple more examples of the fraud that led up to the crisis.

Back in the year 2000, property appraisers began to complain that mortgage lenders were forcing them to over-value property. They actually put together a petition in 2000 and began to circulate it. They continued to add names until 2009! Here were their main complaints:

We, the undersigned, represent a large number of licensed and certified real estate appraisers in the United States, who seek your assistance in solving a problem facing us on a daily basis. Lenders (meaning any and all of the following: banks, savings and loans, mortgage brokers, credit unions and loan officers in general; not to mention real estate agents) have individuals within their ranks, who, as a normal course of business, apply pressure on appraisers to hit or exceed a predetermined value.

This pressure comes in many forms and includes the following:

  • the withholding of business if we refuse to inflate values,
  • the withholding of business if we refuse to guarantee a predetermined value,
  • the withholding of business if we refuse to ignore deficiencies in the property,
  • refusing to pay for an appraisal that does not give them what they want,
  • black listing honest appraisers in order to use “rubber stamp” appraisers, etc.

They collected 11,000 signatures! I don’t know how many appraisers there are in the country, but this had to be a big chunk—11,000 warnings of massive, pervasive, fraud. And that was the very first step of the food chain, the first layer of Shrek’s onion.

You can see the petition and signatures here: The petition was widely circulated—I saw it well before the crisis hit. It was addressed to the Federal Financial Institutions Examination Council, and I am sure many in Congress and at the Fed saw it. They ignored it.

Go ahead and read through the signatures as the signers were allowed to make comments. Go back to the very first page of signatures; read it and weep. Then come back here. We’ll wait.

They warned:

*This is not good for the public at large! *Not only do we get subtle overtures to make value, we will be the first to get blame when loans go south. *It’s time to clean up this crap! Regulate and institute the lending institutions. *22 years as an appraiser this practice worsens every year. *L.O.’s (loan officers) have no standards or ethics, that I can tell. *This is an unfair practice and puts far to much pressure on the appraiser, since his/her livelyhood is involved. *I remember the late 80’s to early 90’s when I was appraising properties for the FDIC during the bank take-overs. It’s coming. *Appraisers are like pawns in some mortgage brokers game. If they don’t get what they want, they blacklist you. *This list will become a ‘blacklist’.

Folks, this was 2000. Go ahead and scroll through the rest of the 11,000 signatures. Gee, do you think that if appraisers were already warning that property was being over-valued in 2000 that maybe that fraud might help to generate a speculative bubble? A bubble that continued for 6 more years?

Yet I can recall as late as 2007 that the Fed was sending out “professional” economists (one could use a much more derogatory word to describe such “professionals”)  with “rigorous” papers demonstrating that housing prices were driven by “fundamentals”. There was no bubble, according to official and public Fed pronouncements right up to the crash. In fact, it was all bubble. As early as 2000. And then it just bubbled more, fueled by fraud.

The poor appraiser was only the first layer of fraud, and you’ve got to have a bit of sympathy. They raised a red flag, knowing that just by signing the petition warning of fraud, they could be blacklisted by the mortgage brokers. To be clear, that does not absolve them of responsibility. The petition makes clear that many of them bought the devil’s bargain. To save their own families, they lied—which has cost millions upon millions of families their homes. They played the fraud game with the mortgage brokers, and they’ve got to live with their guilt.

Now, of course, the individual mortgage brokers were only reacting to the demands of the mortgage lenders—who wanted high appraisals so they could make bigger loans to those less able to afford them. And the lenders, in turn, were responding to the demands of investment banks that wanted toxic mortgages to securitize. The raters had to give triple A to the trash—or like the appraisers, they’d get blacklisted. In the bulls-eye center of the fraud was the investment bank—the blood-sucking vampire squid of Wall Street—that drove the whole criminal enterprise. I’ll come back to this below, but the junk mortgage was the food that fed the investment bank beast. All the rest of the fraudsters were mere appendages. Yes, it ALWAYS comes back to Goldman Sachs. Just read John Kenneth Galbraith’s The Great Crash, which devotes a whole chapter to the Squid. This global financial crash will devote 9 chapters to the Squid.

Here’s the coda to the story on the appraisers. They’re getting blamed and sued—just as that poor lonely appraiser warned back in 2000: “we will be the first to get blame when loans go south”. Yep, and they are losing the lawsuits. Take a look here: Appraisers are damned if they do, damned if they don’t. Some are suing the banksters: appraisers are pursuing class action suits against the banksters, asserting they were blacklisted if they refused to engage in fraudulent appraisals. The problem is that if they win, they are then subject to suit by homeowners (who are losing their homes) since they overpaid, and got mortgage loans that were far too high relative to “fundamentals”. I do not need to remind readers that these mortgage debtors are now massively underwater—thanks to the banksters that forced appraisers to jack up values far beyond what the homes were worth.

So, the wrong people are going to lose. Homeowners and property appraisers. Again, appraisers should have “just said no”. It is an easy thing to say in retrospect. But prosecutors should be going after the real criminals—all of whom still work at the “dirty dozen” top twelve banks. But that will not happen. President Obama has made that abundantly clear. No top fraudster will ever be investigated for fraud. That is national policy. Wall Street will be protected at all costs.

Here’s anecdote number two. I admit, this is nothing more than an anecdote but it is from someone I trust. This is about the brokers doctoring documents and about their lending banks continually insisting on lower underwriting standards. And I’ve heard many similar stories. Finally, it fits. It helps us to understand why all the layers of the onion were fraudulent. Here’s the story (it is long but worth the read):

“I can tell you from first-hand knowledge that mortgage broker supervisors were instructing their associates to add 10’s of Thousands of Dollars stated income to the applications (AFTER the borrowers had signed the applications).  The banks knew it and encouraged (even instructed) the mortgage brokers to do this!!! Indeed, my own son, went to work with a mortgage broker; and during the mere two weeks he worked there, my son discovered that this was common practice (even “the plan”).  During his very first mortgage application intake, he called both his father (a criminal and civil lawyer) and me (a foreclosure defense lawyer) — he was totally “freaked out” at what he was being “instructed” to do (namely: to add $40K to stated income of the applicant — without the applicant even knowing!). We, both, told our son to immediately clean-up his desk and walk out of the office without a word.  And, yes, he also reported this to the state attorney’s office — but, alas, NO FOLLOW THROUGH. All in all, banksters were in a “feeding frenzy” to create as many securitized pools as quickly as possible.  The financial industry (as a whole) was feeding “phony baloney” statistics and information to business journalists and the general media touting an unstoppable real estate boon.  And all of this was intentionally done to facilitate “great impact for the buck” and to “Feed their Greed”.”

The Points:  Mortgage brokers and the banks/lenders/REMICs “conspired” to “encourage” borrowers/real estate investors (those exactly like “the Ritters”  in Fort Washington, Maryland — and other types of borrowers) to make as many such loans as possible.  Moreover, banksters fraudulently induced borrowers by inflating the appraisals, presenting phony statistics and future predictions (on which borrowers relied to their detriment) — and “to hell” with legitimate underwriting!”

 “The CONSPIRED PLAN: To create “attractive” securitized trust “investments”  to sell on Wall Street to “unsuspecting securitized trust investors.”  NOTE:  Many “Investors” being Pension Plans for blue collar workers, which were instructed by the Pension Plans to invest only in verifiable “LOW RISK” investment vehicles.  And let’s not forget other types of employee Pension Plans, SUCH AS FOR LEGISLATORS AND JUDGES!!!! That’s a whole other “can of worms” resulting in “bank bias” in our judicial system and more (a discussion for another time).”

“ However, when the “world came tumbling down” precisely because of these illegal actions — the banksters REFUSED TO CORRECT THE ATTROCITIES by, at least, granting fixed interest rate refinance (upon borrower request and before a default); OR granting loan modifications (after “instructing” borrowers to actually default — “so that they could be placed in the loan mod process”), OR granting short sales (with releases of deficiencies); OR granting deeds-in-lieu (with releases of deficiencies) — AND COMPLETELY FORGET ABOUT PRINCIPAL REDUCTIONS OF THESE ARTIFICIALLY AND INTENTIALLY INFLATED PROPERTY VALUES!!”

“So, yes, face the reality, it all comes back to “Those Miserable Banksters” and their greed to create securitized trusts — who intentionally encouraged (often even sought-out) “questionable” borrowers and real estate investors such as the Ritters example;  who intentionally encouraged (often sought-out) unsophisticated first-time borrowers;  who intentionally (often sought-out) current homeowners offering them, sometimes to the point of harassment, refinanced  and/or line of credit loans…and other examples that could go non-and-on.”

“Yet what all the banks, mortgage brokers, REMICs, and trustees  had to do from the very beginning was to act ethically and legally;  They DID NOT, and, so, when the banksters have to reap the repercussions of having to “deal with the “Questionables-of-the-World,” don’t expect any deep empathy or sympathy from this foreclosure attorney who represents good, decent, and responsible homeowners and their families who are facing foreclosure because they experienced decreased income or even lost their jobs “at the hands of the banksters.”  

Wow. There you have it. In the next blog I’ll try to make sense of this. Why was the whole damned thing based on fraud—something approximating a pyramid-Ponzi-Madoff scheme? That is really the question.





JonfMarch 9th, 2012 at 4:14 am

Who woulda thunk it?

It is hard to understand why no one has been put in cuffs for this. So many people "thought" they were getting rich within the bubble and, no doubt, some did but others were leff with no chair to occupy when the music stopped. I have a friend who was "planning" on using the money from her home and two other houses for retirement.. She lost a bunch and took big losses on all of them, and she was one of the lucky ones.

So here we have a private sector where for six or seven years thought they were making money, er saving I guess. And then, it all went to hell. And now the fall out can be seen all around. It even ended with a bailout of, what was that crazy number? Oh year, $29 Trillion, with a T.

A small point here: I think the very exisitence of that thing called MERS was a fraud. And it could cast a long shadow. Nobody in jail for going around the county recorder's office for a few bucks?

Where were the regulators, the fed, the SEC, anyone? But millions were complicit in this. Don't look there nothing to see.

michael PhippenMarch 9th, 2012 at 2:28 pm

SO- Randall Wray- Pleased don't stop with your investigative process, watch your back, the stakes for your success and someone's failure are not trivial, as I am sure you know. I was one of the fools who believed the housing growth story in Florida. It ,as you have pointed out ended badly. I ran out of money paying debt service for oh, so many years. Big personal wealth evaporated and the FDIC in partnership with Rialto(Lennar) is still going after personal guarantee's of 5500 of us who got fooled by you know who!!

RyanMarch 9th, 2012 at 6:19 pm

Don't forget the tax appraisers/assessors that played along and defrauded homeowners out of money they knew they were not entitled to, don't forget the homeowners that 'earned' 20% a year' on their homes, and the biggest Alt-A liar loan buyers of all, Fannie and Freddie, that bought loans directly without wall street from all the worst players. They especially by sheer volume of liar loans make everything Wall Street did look like small potatoes.

Michael E PicrayMarch 9th, 2012 at 10:48 pm

Suggest you make sure that your foreclosure atty is aware of "Kessler v Landmark Natl Bank" (KS supreme court) If the property was listed on MERS and the State's laws require original deeds of trust and mortgages to foreclose – then such properties are probably NOT foreclosable!!! As I understand it, a home owner who finds themselves in the position of being in one of these properties in the right State can stop worrying about foreclosure – and probably stop making the payments too and the bank can't do SQUAT about it!

Michael E PicrayMarch 9th, 2012 at 10:53 pm

Why would tax appraisers and assessors be complicit? They base their appraisals on the selling prices of the real estate they value. They would have no way to determine that those selling prices were inflated. If a property sells for a given amount, then THAT is the property's value – as proven by the seller finding someone who was willing to pay that much for it. Value is that price that a willing seller would accept from a willing buyer.

RyanMarch 10th, 2012 at 1:20 am

So the privately paid real estate appraisers warned the government fraud was happening and the publicly paid real estate appraisers were duped? They both evaluate values using the same sales data, same sets of information. But one group is culpable while the other gets a pass?

Michael E PicrayMarch 10th, 2012 at 2:13 am

"They both evaluate values using the same sales data,"

Actually, no they don't. The pre-sale appraisal is based on "similar" properties that have recently sold in the area, and the sales price is then adjusted based on differences between the properties. Thus there would be a considerable bit of "latitude" as to how much "adjustment" should be made in the value of the property for sale and whether the value should be "adjusted" up or down and how much – all at the discretion of the "appraiser."

The property tax value is set by the amount of the actual sale of a specific property (adjusted over time for things like improvements, and the success or failure of owner challenges to the valuation) and does not consider any other factors. ie there is no "adjustment" – at least initially. Depending on the laws of the State the property is located in, there can be adjustments later based on things like deterioration, additions, & etc – but not at the time of sale.

Any "valuation" of a real estate property is like a balance sheet – it's a snap shot of estimated value at that point in time. I know people who have kept their same valuation for nearly 20 years because they successfully challenge every attempted increase. Most people don't bother to challenge the assessor's valuations – which are sometimes based more on how much tax revenue the government needs rather than the value of the property, and so could be challenged..

AndrewMarch 11th, 2012 at 1:48 am

11,000 signatures is a lot of signatures. Interesting article. The question is, if I bought a foreclosured house, don't you think it is extreme that I have to give back my house? I mean, I have invested tens of thousands on my house and I am a low income individual.

RayPhenicieMarch 11th, 2012 at 2:22 am

I would invite anyone-as a relevant side bar to the article-to go on and type in your zip code to see a shocking (not an exaggeration!) picture of home values in your city. In my zip code home values have moved down about 65% since 2005. Homes that are for sale have been vacant for 2-6 years, or longer. The zip code had an average value ranging from 140,000 to around $300,000 in 2007, less than half that now.

My issue is the near future value of home in this zip code are moving down an average of 7 to 12% per year. Where is the bottom? Will this turn in around in 5 years? That's the soonest I would predict based on the fact that we have almost too much to do to turn this market around– but how do I know it will turn? What if the value continues down for 10 years?-means homes that sold for $150,000 in 2005 could be worth $25,000 or less in ten years-about the price of medium priced car.
We should get used to the idea that after a certain age-35-45 years-homes begin to depreciate in value-unless there are mitigating circumstances. Mostly, a 55 year old home has almost no future value-for at least 95% of the time-
From my quick appraisal of the situation here in the captain's chair.

michelle44March 11th, 2012 at 8:10 pm

You have not only said that all foreclosure is fraud, but that all foreclosure is theft, even murder!. MERS is central to most of your argument (and it is indeed a shameful mess) but you never tell your readers how many mortgages are in MERS (only about half, according to NYT), or how many foreclosed borrowers fully accepted the foreclosure . Shoddy academics make sweeping generalizations based on anecdotes. Real academics use real evidence and present it fairly. And how many dissenting comments do you delete, only to the commenter as a "bankster," with no know knowledge of who you are talking about? Yes, please do "make sense of this" in your next blog, because all you have provided so far is a blanket indictment based on examples, of which both sides have many.

Michelle44March 11th, 2012 at 8:43 pm

Mr. Wray- Please read this quote from Gary Shilling, a prominent economist, and tell me whether at least some of these borrowers are not victims of banksters:

"Rent-Free Renters: Since 2006, 3.1 million people are essentially living rent-free by not paying their monthly mortgage payments. Assuming a monthly mortgage bill equivalent to the national average of $1,721 per person, these nonpayers have increased their purchasing power for other items by $65 billion at annual rates, or the equivalent of 5.6 percent of after-tax income….This may be an important reason that consumer spending has held up as well as it has in this recovery."

Links 12/3/2012: Debian 5.0.10 Released, Skolelinux 6.0.4 Released | TechrightsMarch 12th, 2012 at 11:26 am

[…] The Financial Crisis And Shrek’s Onion Of Fraud In the last couple of weeks I’ve been pushing foreclosure fraud. Well, not pushing the fraud but rather arguing that foreclosure is fraud. It has to be. If a mortgage was registered at MERS, then the chain of title was broken. Broken chains mean the bank cannot foreclose. But that was MERS’s business model, and so most mortgages are “infected”. Still, there’s a lot more to it than that. […]

LRWrayMarch 12th, 2012 at 9:10 pm

Michelle (and others): I've written a lot on all these issues, most of the early ones are at HuffPost. You can easily locate all posts by me there and read up on it.

Perhaps you did not notice that the "murder" reference was a quote. Read carefully please.

Or should I presume you are a bank lawyer?

Of course there was some borrower fraud; best estimate: 20%. Lender fraud was 80%.

Michelle44March 13th, 2012 at 3:51 pm

Yes, framing some of the debate in terms of what percentage is borrower fraud vs. lender fraud is the right way to discuss this. Do not assume I am a bank lawyer. I am now a technology investor with no current skin in this game, but used to practice law for lenders and borrowers, initially in the 1980s real estate debacle in Texas. My experience there and later indicates that you are right to focus on the systemic pressure on appraisers, though I would not categorically indict them. It's meaningful debate on what the percentages are that I want, but I have not seen it in the litigation or media. I would guess that the right percentages are 20% borrower fraud, 50% lender "fraud," but with 95% of that lender fraud resulting in no material damage to the borrowers. You quoted the "murder" thing with full approval and earlier said flatly that all foreclosure is "theft." That kind of language, categorically applied to everybody in the industry, plus the Bush conspiracy theory, are what irk me. It sows extreme distrust on both sides, diminishes the chances for needed reform, and dilutes the credibility of claims being pursued by the borrowers who have the real damages — which should be the most important thing to you.

Wendell FitzgeraldMarch 15th, 2012 at 4:59 am

Income from real estate speculation on the best of days is wholly unearned. Fraud enhanced real estate speculation creates unearned incomes on steroids. The real kick in the pants of America's favorite historical pastime, i.e land speculation at the heart of all real estate transaction, is that all income from land rents and sale prices of land are wholly unearned. No one has had the courage in the main stream (I hope Mr. Wray reads and is encouraged by this) ever speaks of this self-evident fact of economics. I am a thief and exploiter of my fellow man in this regard; I just no longer deny it.

All income from transactions where the receiver did not create the value received is wholly unearned. This applies to slavery, land speculation, collection of interest by banks of money loaned that they create out of thin air, and every other kind of asset speculation. Income from ownership of land and natural resources is the largest component of this ocean of unearned income amounting to somewhere between 20-35% of GNP all by itself. In fact Wall Street and the current rapacious financial sector learned its lessons from the land owners going way back even before feudal times. It is all about getting something for nothing, a free lunch and undeserved subsidy at the expense of everyone else. It is America's favorite game lusted after everywhere by everyone who can find a way to participate. Hell, many of our mothers and fathers played the game but they were micro players in a very very very large historical game. Of course the elites, the top of the top of the economic heap (those darned 1% folks) have been at this for centuries and have monopolized wealth so much complained of these days.

Not even the Left understands this because they think that it is the monopoly of capital that is the problem. Yes, the monopoly of capital is a problem to be sure when it is monopolized which mostly it isn't. And when capital is not monopolized the profit derived therefrom is an earned income. Thus it is labor in concert with capital that is at the mercy of the owners of the earth. Both must pay the rent for the right to have a place to be and work. It is the monopoly of land and natural resources that fits every criticism that the left throws at capital. Land is not capital and those who fail to make the distinction which with all due respect for the motives of the left muddy the waters of understanding. My opinion. Prove me wrong.

Mr. Wrays' research and writing is brilliant and so thank you very much. It just happens, in my opinion, to be the most current detail of the much larger game of unearned incomes and stolen wealth that has siphoned the economic benefit of all human progress into the hands of the relative few. it's almost enough to make one stop believing in progress. So, yes, let's clean up Wall Street and regulate the financial sector but let's also look at the bigger picture.

There is a simple solution that has been around for over a century called land value taxation which involves the shifting of taxation off of earned incomes from labor and real capital invested in the real economy onto land values. This works really well as acknowledged by many economists brave enough to counter the flow because land value is created 100% by the community of all people and thus taxation of it does not penalize anything anyone does to create real economic value. This could be the heart of breaking out of the current impasse over taxation. I say tax unearned incomes and leave earned incomes alone. 35+% of GNP ought to be enough of a source to fund all levels of government with plenty to spare for health care, education and income subsidies to all the people instead of just a few.

Google "land value taxation" and "Henry George", the 19th century American political economist and social philosopher.