Loan Modification

E-mails Suggest Bear Stearns Cheated Clients Out of Billions

By Implode-Explode Heavy Industries

The traders were essentially double-dipping -- getting paid twice on the deal. How was this possible? Once the security was sold, they didn't have a legal claim to get cash back from the bad loans -- that claim belonged to bond investors -- but they did so anyway and kept the money. Thus, Bear was cheating the investors they promised to have sold a safe product out of their cash. According to former Bear Stearns and EMC traders and analysts who spoke with The Atlantic, Nierenberg and Verschleiser were the decision-makers for the double dipping scheme, and thus, are named as individual defendants in the suit.

Abuses like these have long been hypothesized to have been going on, due to the lax treatment of ownership of the loans underlying securitizations. Note that in the above case, where Bear Stearns traders put back loans to the originator, but then kept the money for themselves (rather than for investors of the trust) is only possible if there is no hard tracking of the loans that underly the securitization. If Bear had to properly convey titles to the trust, then remove them for a put-back, they would not be able to do this.

It has also been hypothesized that the same home loans have been sold twice or more, as fictional "backing" for portions of multiple securitization trusts (even including Fannie/Freddie loans).

The more we learn, the less this would surprise me, if it were the case.

Full post as published by Mortgage Lender Implode-o-Meter on January 25, 2011 (boomark / email).