I had decided to quiet down while negotiating for a new position. After all, I might end up competing with or joining a company I was talking about. That’s still true, but an article from Bloomberg just has to get more notice.
I was very skeptical about the impact of the robo-signing scandal, and about the wild claims that the MERS registration system made foreclosure impossible for tens of millions of delinquent borrowers. So far, at least, I was right that banks weren’t going to “eat” hundreds of billions in losses for what amounts to administrative sloppiness.
This time I am ringing the alarm bell.
I saw this article yesterday in an earlier form, and today’s addition only fills in a very ugly picture.
To cut right to the dirtiest (alleged) behavior, EMC, the former Bear Stearns mortgage servicer, was part of a scheme to put newly purchased bad mortgages into MBS deals before they were three months old.
Nothing wrong with that, right? No, but when the loans are already going bad, investors in the MBS bonds shouldn’t be set up to take the losses. Instead, the dealer should be taking those Early Payment Default (EPD) loans back to the lender and demanding replacement with good loans.
The plaintiffs in the suit say Bear let the loans go bad, but left them in the MBS deals, causing losses for the MBS investors. At the same time, Bear was demanding payment from the lenders for the same loans but Bear kept the payments.
If this all gets proved in court, there will be real and painful results for EMC’s current owner, JP Morgan.
Unfortunately, there are a couple of other major issuers of private-label MBS that had similarly bad (or even worse) early defaults and losses than Bear Stearns deals in that period.
Those investment banks haven’t been mentioned in the cases Jody Shenn and his colleagues wrote about, but it would be very unusual for bond investors to limit their investigation to just one issuer when the pattern of early losses was equally bad or worse with others.
A cyber-buddy pointed out another article on this scam in Atlantic Monthly, which lays it out in even clearer terms.