Whistleblower Speaks On Fraudclosure

     

Zero Hedge has been approached by an individual who participated directly in the various aspects of what is now broadly known as Fraudclosure. The below narrative recounts his experience in the due diligence process of selecting loans for the MBS pipeline. And far more than just legalese "technicalities" or a broad abrogation of property rights, as he points out there is a far more palpable issue for all those who hold Mortgage Backed Securities or other pool aggregations of mortgage loans: "we have no idea what is in those packages." This coming from the person who helped pick, diligence and sort through the various loans…

Full exposition:

The truth behind the foreclosure crisis.

Yes, I am choosing to remain an anonymous coward. I just have been waiting this shoe to drop for a long time. The last thing I want to do is have to explain myself and get my ass sued for defamation. Not worth it.

This much I can tell you. We have no idea what is in those packages. I personally packaged billions in MBS which have been placed on public shelves. Those assets were underwritten by Goldman, Morgan or name your investment bank.

I started packaging loans as early as 2003, at the beginning of the crisis. After working for a large aggregator in New York, I joined GMAC. Those were good times. I worked directly with the traders to package assets that we would buy from our institutional clients and broker channel. It was the trader’s responsibility to close the deal with the underwriter. He would then hand the deal to the securitization group where it was managed by an asset specialist and a securitisation manager. We take the pool to the ratings agencies, S&P, Fitch, or Moody`s where we get levels of overcollateralization required for the waterfall of public tranche offerings.

Breakdown

Then, we worked with underwriters of the deal to perform due diligence. That is where this process breaks down. They use sampling to verify the makeup of the pools. There is a lot of pressure to get the deals done in a timely manner so they don’t have time to check every asset. The most I’ve ever checked on a deal is 30%. We’ve done some pools that came back very different from what the trader originally told us. I’ll give a personal example and show how it relates to the foreclosure crisis.

I put together a large subprime deal where we said that the percentage of Stated income assets was 10%. Out of a pool of over 500 assets, we ran our due diligence and pulled a sample of 50 assets, we had over 25% of the assets come back as stated income. Well, we got another 50 assets and still came back with 22% stated. It was obvious to me and the underwriter that the stated income levels were higher than originally reported.

How did we handle this issue? We threw all the stated income assets out of the deal. In this case we threw out 22 assets and packaged the deal as 10%. In fact that is how we would typically handle issues where we had discrepancies. I told my boss on several occasions that it was a real fishy way of doing things, but as everyone was also doing it, my coworkers, the guys from Goldman, the agencies, I just kind of went along with it.

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October 21, 2010