“Why crisis era mortgage defect rates cited by the government (and others) are false, a massive Red Herring. Part 1: The General Logic Behind My Argument…
…I argue that the crisis-era mortgage defect rates aren’t based on any work they performed post-crisis. It’s based solely on initial quality control reports, which are not accurate, fact-based documents, but instead inadmissible Hearsay.” Mike Perry, former Chairman and CEO, IndyMac Bank, June 9, 2016
The Logic of My Argument:
I didn’t know this, before being sued civilly by roughly a dozen private plaintiffs and the S.E.C and FDIC for over $1 billion, but private plaintiffs’ lawyers lie all the time, within their civil litigation. Government bureaucrats and politicians, outside of civil litigation, lie all the time and pursue their own self-interest (as we all know), but importantly they also can defame American citizens and institutions, because they are protected from defamations suits by Sovereign Immunity. Various government bureaucracies (like the FDIC) have also started to use private plaintiffs lawyers in various civil matters against American citizens and institutions. In other words, in some civil litigation, the government is adopting the despicable and unethical practices of much of the private plaintiffs bar. The bottom line is I believe most of the crisis era civil litigation by the federal government has been a lie, designed to cement (in the minds of the media and public) the false liberal narrative that it was “greedy and reckless” bankers and poor regulation (and not the government itself) that caused the crisis. I have cited numerous examples that document my position on this blog. In the next few postings, I will prove that one of the governments key contentions, that pre-crisis era mortgage loans had excessively high mortgage defect rates is bogus, a Red Herring. Here I explain, in bullet-point format, my logic in more detail:
- Private plaintiffs’ lawyers are allowed to lie “within the four corners of a lawsuit” and do all the time, filing frivolous claims against businesses and their officers and directors.
- For example, in IndyMac Bancorp’s first private securities class action filed in 2007, when our stock declined significantly as the crisis began, a private plaintiffs law firm literally took a securities lawsuit against another mortgage company and changed the title to IndyMac, Michael Perry, etc. and filed it. They didn’t have any knowledge of wrongdoing or facts, how could they? They didn’t even bother to change the name, facts, or words from another lawsuit, within the body of their IndyMac suit. The federal judge in the matter allowed them to amend this lawsuit around a half-dozen times, including changing “the truth has been revealed-date” at least twice. They also had two very small, elderly shareholders (not a single major IndyMac shareholder joined the suit), in violation of the PSRLA standards. No real work was ever done on their part to determine any material facts or allegations. In other words, the stock had declined, therefore they were going to manufacture a bogus securities lawsuit. (There was a second bogus one filed against me and IndyMac from the date the first one ended until IndyMac was seized on July 11th….again totally bogus, with no work done on their part to ascertain any facts or real allegations.) Both were settled for a few million dollar of D&O insurance. These private plaintiffs securities lawsuits were a sham.
- As I said above, I didn’t know it and I am sure you didn’t either, but government officials and politicians are allowed to defame American citizens and institutions, with impunity, and are protected by sovereign immunity from defamation lawsuits. What I saw happen in crisis era settlements with the government, is that the legal settlement document says one thing and the government officials then issue a press release “bad mouthing” the individual(s) or institution. Don’t believe me? Just look at the recent Wells Fargo/DOJ/FHA settlement. Nowhere in the legal settlement document does it say that Wells Fargo is a terrible mortgage underwriter and yet in the government’s press release on the settlement, that is exactly what government officials called Wells Fargo. Why is there such a big factual difference between the legal settlement agreement and the government’s press release? Wells Fargo can’t sue these government officials for defamation, because they are protected by Sovereign Immunity!
- The government was under enormous populist pressure to jail, destroy the careers of, sue, and/or fine bankers/mortgage lenders, as a result of the crisis, because the liberal/populist view was that “greedy and reckless” bankers were the primary cause of the crisis….when in fact (as I have documented extensively on this blog), it was well-intended government distortions of free markets (housing policies, government mortgage guarantees, The Fed, etc.) that was the primary cause.
- The S.E.C. investigated extensively and sued me civilly in early 2011. For alleged misleading and omitted securities disclosures in a 90-day period between February and May 2008. I won everything that went to court, nothing was proven because I did nothing wrong. You can read all about it on this blog. Importantly, there was not a single allegation involved mortgage lending, mortgage securitization, and certainly not mortgage defects. And yet, the last time I looked a blatantly false and defamatory press release that the S.E.C. issued when they initially sued me, was still publicly available on their website. Why? To cement the false liberal narrative about the crisis and Sovereign Immunity! (Otherwise, I would have sued them for defamation.)
- The FDIC, utilizing private plaintiffs’ counsel in L.A. (the same or similar to the type of counsel that files bogus private securities lawsuits I discussed above) sued me civilly for $600 million, in mid-2011, alleging I was a negligent banker, because I should have known the crisis was coming in early 2007 and caused IndyMac to fund roughly $10 billion less in mortgage loans that year. Where did they get the $10 billion and $600 million figures? Not from any work they did. It came from our 2007, third or maybe fourth quarter 10-Q. We publicly disclosed at that time, that when the private MBS market collapsed in August 2007, we like every major mortgage lender, got stuck with loans ($10 billion) that could no longer be sold/securitized into the secondary market and so and had prudently taken a reserve/mark-to-market on them of $600 million. Let’s say it again, the private lawyers the FDIC hired did NO WORK to determine their bogus claim against me.
- Despite the above, and IndyMac Bank failing in July 2008 and being at the center of the mortgage crisis, not a single allegation by anyone was ever proven against me, because they were not true.
- President Obama’s Financial Crisis Commission Inquiry Commission was chaired and controlled by Democratic politician Phil Angelides. The Commission was made up of six Democrats and four Republicans. Not a single Republican on the Commission agreed with the majority Democrats view that the primary cause of the financial, mortgage, and housing crisis was “greedy and reckless” bankers and poor government regulation. In other words, it was a not a fact-based report were the truth was sought, but a partisan political report designed to help cement the false liberal narrative that “greedy and reckless” bankers were the primary cause. (Two of the four Republican commissioners have complained in their extensive writings about this, including one who has authored a book on the true, root-causes of the financial crisis.)
- Phil Angelides, a very active and senior Democratic politician, has continued (and recently) to cite high crisis era mortgage defect rates as a primary cause of the crisis and complain that there was not the appropriate accountability/prosecution of crisis era bankers, as a result.
- I recently corresponded with one of the Republican commission members and he is fairly confident that the commission did NO WORK (their own, contracted, statistically-valid audits) on crisis era mortgage loan pools/securities to determine Mr. Angelides’ mortgage defect claims. He can’t be fully certain he said, because the Republican commissioners were kept in the dark on many matters, but he is highly confident.
- So, the high crisis era mortgage defect claims rates, appear to come from the following historical sources: 1) internal quality control reports from banks and mortgage lenders, 2) quality control reports performed by private third party firms, for mortgage securities underwriters, and 3) quality control audits of mortgages by FHA, VA, Fannie Mae, and Freddie Mac. The important point to understand is these documents, which have been relied upon by the government and others, to make bogus/Red Herring claims of high mortgage defects, are really just inadmissible “Hearsay” evidence. How so? I am not going to get into all the reasons why here (look up the legal definition), but I am going to focus on two issues: 1) These quality control reports were never determined to be factual evidence in any court of law, as far as I am aware. You might ask yourself why the government didn’t want that to happen? 2) In submitting evidence in court, the opposing side is allowed to present arguments and/or evidence to rebut the claims. Think of these initial findings like an IRS audit and its initial findings, you and your advisors/counsel get a chance to explain and/or provide additional documentation, and even appeal the matter to a court of law. As far as I am aware, that has never happened. Again, ask yourself why the government didn’t want that to happen? Ask yourself why the government would use Hearsay documents, never authenticated as true and factual evidence by any court, as their sole claim of high mortgage defect rates?
- I contend that the Democrats have used this mortgage defect Red Herring and their nearly 100% control over the Big Banks (as a result of the crisis and because they guarantee their deposits, and most mortgages and student loans), to coerce them into settling various civil matters for billions that cement the false liberal narrative that “greedy and reckless” bankers took advantage of “hapless” mortgage borrowers.
- Don’t believe me? Then why didn’t the government, if these allegations were true, bar or suspend these Big Banks or establish special monitoring programs for them, as it relates to government mortgage programs? Why didn’t these Big Banks express public contrition and/or lay out exactly what mortgage underwriting reforms they planned to make? Why weren’t their CEO’s forced to resign, if they really were terrible mortgage underwriters and had defrauded government mortgage programs? Why didn’t their stocks decline, when some, like Wells Fargo, were lambasted in press releases by the government? The week that Wells Fargo was described by the government as a terrible mortgage underwriter, who intentionally withheld reporting FHA mortgage defects to the government, and thereby defrauded the government; the week that occurred, the government approved (a rare type of approval) them as a special U.S. Treasury Securities dealer! I will tell you why. I believe the management, boards, and shareholders of these Big Banks believe these settlements are bogus; a fraud designed to cement the false liberal narrative about the crisis. The government must believe the same, otherwise why would they allow management to stay and these firms to continue to do business with the government, and with no apparent special monitoring or change in business practices?
- Don’t believe me? Why did nearly all of these Big Banks stop doing business with FHA, after these settlements? I’ll tell you what I think. These Big Banks believe they were falsely accused by the government, in regards to their FHA lending/mortgage underwriting, and coerced into these settlements, and they are pissed and are diversified enough and have large enough balance sheets, that they don’t need the FHA program and it’s False Claims under The False Claims Act. And they are sending a very public message to anyone who is listening, that government is not telling the truth and has been unfair to them.
- Don’t believe me? You don’t have to. I am going to prove (in my next two blog postings), by using publicly available information from FHA the following: 1) FHA’s initial mortgage defect rates(in its quality control reviews) are about the same today, as they were during the crisis era. In other words, nothing’s really changed in regard to FHA mortgage underwriting defects, and 2) When FHA allows the adversary process (that occurs in say a tax audit or in a court of law) to occur, these initial mortgage defect rates (the ones cited by the government and others) decline by 80% to 90%…to a level around 4% to 5% or so!!!! By the way, this is roughly the same defect rate (4.8% in 2015) that the federal government has on all of its federal program payments, according to the GAO. In fact, Medicare, Medicaid, and the Earned-Income Tax credit all have significantly higher payment defect/error/fraud rates.